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This document is the digitalized form of the printed book: 

Bertil G. Ohlin 

The Cause and Phases of the World Economic Depression 

Report presented to the Assembly of the League of Nations 

Geneva: Secretariat of the League of Nations; 1931. 

Series of League of Nations Publications 
II Economic and Financial 1931. II A. 21. 

Official Number: A 22.1931 II A 

A second edition of the same year is available on the Internet Archive at: 

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Bertil Gotthard Ohlin (23 April 1899 - 3 August 1979) 
Nobel Memorial Prize in Economic Sciences 1977 



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The Course and Phases 

of the 

World Economic Depression 



Report presented to the Assembly 
of the League of Nations 



Published by the Secretariat of the League of Nations 
GENEVA 1931 



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[Distributed to the Members 



TABLE OF CONTENTS 






Series of League of Nations Publications 

II. ECONOMIC AND FINANCIAL 
1931. II A. 21. 



Page 

Preface 7 

Annex. - — List of Representatives of Economic Advisory 
Councils and Economic Research Institutes who attended 
the" Meetings held at Geneva on March 2nd-4th and July 
2nd-4th, 1931 9 

I. Review of Post-war Economic Development up to the 

Present Depression : 

A. Production and Trade 13 

B. Changes in Demand 19 

C. Financial Conditions' 25 

Monetary Systems and Capital Markets ; 
International Capital Movements. 

II. Structural Changes and Incomplete Adjustment in 

the Years preceding the Depression : 

A. Crude Food Industries 38 

B. Raw Material Industries 54 

C. Manufacturing Industries 65 

D. Relative Prices and "Wages 71 

E. Movement of the General Price Level as a Special 

Cause of Maladjustment 87 

Post-war Inflation and Deflation ; the Movement 
of World Prices ; Monetary Maladjustments. 

F. The Instability of the Economic Situation around 

1928 99 

III. Business-cycle Tendencies in the Last Decade . . . 105 

IV. The Phases of the Present Business Cycle : 

A. Bird's-eye View of the Cycle 116 

B. The Boom ...,., 120 

C. The Turn ... 7 128 

S.d.N. Z480(A.) 2.430 (I-'.) 0/31. Imp. Hchinlcs S.A. Lnusnnnc. 



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V. A Description and Analysis of tiik Dkphmhhion : 

A. Production and Consumption. . . . • 131 

Production; Building Activity ; COMUmpUon. 

B. Prices, Wages and Profits IWS 

C. Financial Conditions 175 

D. Foreign Trade and Shipping . . 189 

E. International Capital Movements 200 

Outline of Recent Changes ; Analysis of New Capital 
Issues ; The Price of Capital ; The Hnlniico of 
Payments ; Summary. 

VI. Further Analysis of the Depression : 

A. The Character of the Depression 216 

B. Monetary Factors and the Decline of the Wholesale 
Price Level, 1929-1931. .,,... 222 

State of Capital Markets ; Gold Movements and 
their Influence on Credit Policy ; Was there a 
Secular Downward Trend of Prices after the War ? 

C. Recession Tendencies in Different Countries ... . 232 
i General ; Russia ; China. 

D. Relative Changes in Producers' and Consumers' 

Industries 246 

E. The Inflexibility of the Economic System in Relation 

to the Depression 262 

VII. Comparison with Earlier Depressions 274 

Production ; Prices ; Money Markets ;■ Forces making 
for Recovery during Earlier, Depressions. 

a i 

VIII. The Situation in the Summer of 1931. . . . . . . 299 

. 

Financial Conditions ; Production ; Commodity 
Markets ; Wages ; Profits ; Trade ; Public Finance ; 
General Remarks. 



^r- 






JWi 



Distribution of Foreign Issues in the United 



. 






* • 



Table III. — 

Kingdom, 1928-1930 

■*» . . ■■ , i ■ 

-. ■ ' h 

Table IV. — World Consumption of Wheat . . . . . . . . . 

Table V. — Import Duties on Wheat in Certain Countries . . 

Table VI. — Constructions completed, 1922-1930 . . ... 

Table VII. — Changes in the Quantum of Imports and Exports 
of Twenty-five Countries in 1930 ............ 

Table VIII. — Changes in Quantum of Trade of the United 
Kingdom, France and Germany in 1929 and 1930 (by Classes 
of Commodities) • • • . • • * • * * 

Table IX. — Change in the Value of Trade of the United 
States, the United Kingdom, France and Germany in 1929 
and 1930 (by Classes of Commodities) . . . . . . . . . 

Table X. — Value of Trade of Forty-five Countries, 1928-1931. 

Table XI. — Value of Trade of Twenty-four Countries in 1928- 
1931 (by Groups of Countries exporting Manufactures, Raw 
Materials and Vegetable and Animal Foodstuffs) ...... 

Table XII. — Index-numbers of Production (Quarterly Averages) 



Page 

320 
321 
322 
324 



325 



326 



328 
330 



332 



1928-1931 



334 



Appendix. 

Table I. — New Capital Issues on Foreign Account in the 
United States and the United Kingdom, 1924-1930 .... 

Table II 'A. — New Capital Issues in the United States, 1920-1930 

r 

(Domestic and Foreign) 

Table II B. — New Capital Issues in the United States, 1928-1930 



(Distribution of Foreign Issues) 



315 



316 



31 8 



THE COURSE AND PHASES 
OF THE WORLD ECONOMIC DEPRESSION 



PREFACE. 


















I 



The report contained in the following pages has been prepared 
in the circumstances described below by Professor Ohlin, of 
Stockholm University. The work was undertaken as a result of 
a resolution adopted by the Eleventh Assembly calling for 
" a study of the course and phases of the present depression and 
the circumstances which led up to it ". 

In its report dated September 29th, 1930, the Second 
Commission of the Eleventh Assembly drew special attention to 
this question in the following terms I : 

" When we consider the magnitude of the losses from 
which the world suffers during a period of economic stagnation 
similar to that through which the world is now passing, it 
is impossible not to be impressed by the almost absolute 
failure of society up to the present to devise any means by 
which such disasters may be averted. The Committee felt 
that this problem was one which imperatively demanded 
co-ordinated and concerted study, and recommends, therefore, 
in a separate resolution, that the facts and special character- 
istics of the present depression should be ascertained and 
carefully sifted with the aid of work already done by national 
research institutions. " 

As a result of this report, the Assembly, on October 2nd, 
adopted the following resolution : 

" (16) The Assembly, impressed by the seriousness of 
the present situation, by the general recession of employment 
and trade, by the constant recurrence of such periods of 
economic depression and the failure up to the present to 
discover any concerted means for averting the losses incurred, 
resolves that the Economic and Financial Organisation of 
the League, which has already been studying the causes of 
fluctuations in the purchasing power of gold and their effect 



1 Document A.79.1930.II. 






. 



8 — 



upon the economic life of the nations, should undertake Lhe 
study of the course and phases of the present depression and 
the circumstances which led up to it, and for this purpose it 
should collect the information compiled by institutions 
already in existence in different countries, centralise such 
information and, where necessary, fill up any gaps that 
exist. 

" For this purpose, the Economic Organisation, advised 
by, in particular, the Economic Consultative Committee, 
should put itself in touch with national organisations, whether 
consultative or planning councils or research institutions 
concerned with this matter. " 

In execution of this resolution it was decided, after consultation 
with the Economic Committee and the Financial Committee, while 
utilising the services of the Economic Intelligence Service of 
the League to the fullest possible extent, to supplement the 
existing staff by a small additional personnel and to place the 
whole enquiry under the immediate supervision of Professor 
Ohlin. In the autumn of last year previous to this appointment, 
the present Director of the Financial Section made a short tour 
of certain European countries with a view to getting into personal 
contact with some of the economic councils and research institu- 
tions which are referred to in the resolution of the Assembly. 
At the beginning of March last and again in July, meetings were 
held at Geneva of experts from these councils and institutions, 
among whom was a representative of the United States Committee 
on Recent Economic Changes 1 . 

At the first meeting a skeleton schedule of the present report 
was submitted for consideration and criticism. A shorter skeleton 
schedule was also agreed by the meeting as a basis for memoranda 
which the majority of the organisations represented were good 
enough to undertake to draw up and which, like the Government 
memoranda mentioned below, have proved of the greatest value 
in the preparation of this report. At the second meeting, a draft 
of certain sections of this report was discussed and an exchange 
of views on a number of technical points took place. 

A letter addressed to Governments informing them of the 
instructions which the Economic and Financial Organisation 
had received and asking them to submit any memoranda 
or documentation which they might consider useful for the 
purposes of this enquiry was circulated soon after the Assembly 
of 1930 ; the skeleton schedule used for economic councils and 
research institutes was also sent later to certain Governments. 



A list of llicsc institutions and Lheir representatives is annexed — puK« C 



— 9 — 

In response to these letters, memoranda were received from 
the Governments of Bulgaria, Netherlands Indies, Estonia, 
Latvia, Portugal, Roumania, Sweden and Yugoslavia. A report 
on the economic depression in Japan was prepared by the Tokio 
Office of the League. 

In accordance with the instructions of the Assembly, the 
author of the present volume, Professor Ohlin, to whom the 
Financial Organisation of the League entrusted the general 
responsibility for the preparation of the material upon which 
it is based, has worked in collaboration with the International 
Labour Office and the International Institute of Agriculture, 
which have furnished him with information and data relating 
to the subjects with which they are concerned. Unfortunately, 
owing to the postponement of the meeting of the Economic 
Consultative Committee and the desirability of preparing the 
report in time to submit to the present Assembly, it has proved 
impossible to consult that Committee as the Eleventh Assembly 
had intended. 

A. Loveday. 
September 1931. 

Financial Section and 

Economic Intelligence Service, 
League of Nations, Geneva. 



Annex to Preface. 

List of the Institutions represented at the Meetings of 
Representatives of Economic Advisory Councils and 
Economic Research Institutes held at Geneva on 
March 2nd - 4th and July 2nd - 4th, 1931, and of their 
Representatives. 

Those marked with an asterisk submitted memoranda. 



1 .*Austria : Oesterreichisches Institut f iir Konjunkturforschung - 
Dr. Fr. A. Hayek, Director, 
Dr. 0. Morgenstern. 

2.*Belgium : (1) Conseil economique de Belgique, 

(2) Institut des Sciences economiques, Louvain - 
both represented by Professor Leon Dupriez. 



— 10 — 

3.*Czechoslovakia: Poradni sbor pro otazky hospodarske (Eco- 
nomic Advisory Council) — 
Dr. A. Basch, Director of the Division of 
Research, National Bank of Czecho- 
slovakia. 

4.*Denmark : Institutet for Historie og Samfundskonomi 
(Institute for History and Economic Science) — 
Dr. J0rgen Pedersen. 

5.*Finland : Economic Advisory Council — 

Dr. Bruno Suviranta, Director of the Division of 
Research, Bank of Finland, Secretary-General 
to the Council. 

6.*France : (1) Conseil national economique — 

M. Cahen-Salvador, conseiller d'Etat, secretaire 
general du Conseil. 
(2) Institut de Statistique de l'Universite de Paris — 
M. L. March, directeur. 

7.*Germany : (1) Reichswirtschaftsrat, 

(2) Institut fur Konjunkturforschung — 

both represented by Prof. Dr. Ernst Wagemann, 
Direktor Dr. Bramstedt, 
Dr. W. Bauer. 

8.*Hungary : Hungarian Institute for Economic Research — 
Dr. Stephen Varga, Director. 

9.*Italy : (1) Consiglio nazionale delle corporazioni — 

Professor Gino Arias, Member of the Council, 
M. Ernesto Santoro, Ministero delle Corporazioni. 
(2) Instituto Statistica della R. Universita degli Studi 
di Roma — 
Professor C. Gini, Director. 



10.*Netherlands 



(1) Commission on Economic Policy — 
Professor Dr. G. M. Verrijn Stuart. 

(2) Nederlandsch Economisch Institut 
Dr. W. L. Valk. 



ll.*Poland : Institute for Economic Research — 
Professor E. Lipinski, Director. 

12. Portugal: Conselho do Commercio Externo — 

Professor Moses Bensabat Amzalak, Instituto 
Superior de Sciencias Economicas e Financeiras, 
Lisbon. 







— 11 — 

13.*Spain : Consejo de la economia nacional — 

M. Ruiz Almansa, Statistical Department, Ministry 

of Labour. 
Dr. Bermudez Canete, Ministry of Economics. 

14.*United Kingdom :(1) Economic Advisory Council — 

Mr. H. D. Henderson, Joint Secretary. 
(2) London and Cambridge Economic 
Service — 
Mr. G. H. Eastham, Secretary, 
Mr. G. L. Schwartz. 

15. United States of America : Committee on Recent Economic 

Changes — 
Mr. E. E. Hunt, 
Mr. R. K. Haas. 

16. Empire Marketing Board — 

Mr. F. D. McDougall. 

17. International Chamber of Commerce — 

Mr. Owen Jones, 

18. International Labour Office : 

Professor E. Milhaud, Chief of Section. 
M. H. Fuss, Chief of Section. 
Mr. J. M. Nixon, Chief of Section. 
M. R. Guye, Member of Section. 

19. International Institute of Agriculture : 

M. Valentino Dore, Chief of the General 
Statistical Department. 






Chapter I. 

REVIEW OF POST-WAR ECONOMIC DEVELOPMENT 
BEFORE THE PRESENT DEPRESSION. 



A. Production and Trade. 

The war and subsequent changes and disturbances profoundly 
affected the economic structure and activity of the world. In 
Europe, wealth was destroyed on an unprecedented scale ; 
plant in excess of normal requirements was constructed in a 
number of industries to meet the special needs of warfare ; mone- 
tary systems were disorganised and public debts enormously 
increased ; the accumulation of capital was checked by inflation ; 
Russia completely changed her economic and social system • 
and new territorial divisions were created. In other continents, 
the area under cultivation of the principal food crops was rapidly 
increased ; new industries were built up by countries which were 
formerly markets for European products ; and the United States 
of America, from being a debtor, became a great creditor nation. 
As between all countries, free intercourse was long subject to 
legal restrictions. 

From the end of the war until 1929, there was a continuous, 
though laborious, process of reconstruction and consolidation 
under these new conditions. The world's productive and com- 
mercial activities increased rapidly ; but this progress was by 
no means easy or uniform and complete readjustment of pro- 
duction and trade to changing demand was not attained. 

Though the details concerning the development of production 
and trade in this period may be scanty, the important tendencies 
emerge clearly enough. It is possible to measure roughly the 
quantitative changes in the production of basic foodstuffs and 
raw materials in practically all countries of the world, except 






— 14 — 

China. It is possible to estimate the growth of the total output 
of mining and manufacturing industries from the national 
indices of production for a number of leading and representative 
countries. Moreover, the development in the quantum of world 
trade may be roughly measured by adjusting the data 1 relating 
to the value of trade to the general movement of prices. 

It will be convenient to consider briefly, first, the major 
changes which took place in the production and trade of the 
different continental groups between 1913 and the earlier post-war 
years up to 1925, and, secondly, the similar changes between 
1925 and 1929. According to the available indices, the total 
world output of raw materials and foodstuffs in 1925 had increased 
more rapidly since 1913 than world population. Output increased 
by 16 per cent, population by 6 per cent. Thus the aggregate 
destruction of wealth caused by the war had been made good ; 
and the world as a whole was already in these years richer than 
before the war. 

But, while the aggregate production of wealth had rather 
rapidly reached and passed the pre-war level, several important 
consequences of the war remained and were consolidated. The 
production of foodstuffs increased at a considerably lower rate 
than that of industrial raw materials ; and it is, of course, 
natural that, as wealth increases, a gradually diminishing pro- 
portion of income should be spent on food. Taking the world 
production of foodstuffs in the period 1909-1,913 as 100, in the 
years 1923-1925 it averaged about 106, while the world index 
of raw material production, on the base of 1913, stood, for these 
three years, at 113, 119 and 130, and it is probable that the 
output of the manufacturing industries increased even more. 

Another striking result of the development which took place 
in this period was the difference between the situation of Europe 
and other continents. Europe suffered in the years immediately 
following the war both from the destruction of her industrial 
equipment and labour force and from unstable conditions. Her 
production did not reach the pre-war level until 1925. Oceania 
and Asia had increased their production between 1913 and 1925 
by about a fifth, North America by a quarter and South America 
and Africa still more. Every continent, except Europe, produced 
more per head of population. The centre of gravity of the world's 
economic life seemed to shift westwards. This is illustrated in 
the following table : 



1 Shown in detail in the Memorandum on Production and Trade (League of 
Nullons) ; live editions published in 1927-1931. 



(^■■■l 







— 15 — 

Table I. — Indices of Production and Trade, 1925. 
(1913= 100) 





Population 


Production ■ 
A 13 


Quantum 
of Trade 


Europe 

North America 

Rest of World 

World 


101 
119 
106 
106 


102 103 
126 127 
124 130 
116 118 


91 
139 
126 
107 



The volume of world trade had increased less than production ; 
in other words, a smaller percentage of goods produced entered 
into international trade than before the war. Moreover, while 
Europe's production of these crude products exceeded the 1913 
level in 1925, her total trade was 9 per cent, and her exports 
were 14 per cent, below the pre-war level. 

The year 1925 marks in some respects a turning-point in 
post-war economic developments. Europe's production probably 
reached the pre-war level in this year ; and the quantum of 
world trade was for the first time greater than in 1913. In 
general, economic conditions, in their effect on production, trade 
and finance, had become far more stable. The adjustment which 
had taken place laid the foundation for a striking economic 
progress in the quinquennium 1925-1929, which is illustrated 
by the chart on the following page (Chart 1). While the 
population of the world increased at an average annual rate of 
about 1 per cent, its aggregate production of crude products 
increased by 2.6 per cent, and its total trade by 4.4 per cent. 

The main impetus to economic activity after 1925 came from 
an extraordinary advance in industrial technique and manage- 
ment — " rationalisation " in agriculture as well as in the 
manufacturing industries. Equally important, perhaps, was the 
improvement in the means of communication and transit due to 
the increased use of motor-vehicles and electricity. Finally, almost 
all countries gradually stabilised their currencies ; and interna- 
tional lending on a commercial basis reached large dimensions. 

This progress was of course far from being either general or 
uniform. It was much more vigorous in Europe than in other 
continents. The aggregate production of crude products in 
Europe advanced by nearly A% per cent per annum, while the 



Foodstuffs and raw materials : 

A. Weighted according to 1928 values. 

B. Weighted according to 1913 values. 






Chart 1. 
B1 „ M«»,^s, «P^J _ ,,„,,, 




i Tiw llgur«» 



,„r IBM «"d l«M «ro nol ilr 



, oU ycom»«»W»»" llH,l " ,M 



I 



— 17 — 

average annual increase in all other continents taken together 
was less than 2% per cent. Even these figures understate the 
case ; for, in the basic year 1925, the European harvests 
happened to be exceptionally good. Thus, by 1929 Europe 
had recovered the ground lost in preceding years and the 
pre-war equilibrium between Europe and the rest of the world 
had been very largely restored. 

The rising figures for other continental groups represent 
normal advance rather than recovery. The peak of productive 
activity was reached in 1928 in North and Latin America and 
also in Oceania, their levels being respectively 7, 11 and 
15 per cent above 1925. In America, the drop in 1929 was entirely 
due to unfavourable harvests ; the production of raw mate- 
rials continued to advance even in that year. The net increase 
in North America, where a comparatively high level of production 
was reached by 1925, was less in the quinquennium ending 1929 
than in other continents. 

The tendency, noted above, for the production of foodstuffs 
to lag behind the output of industrial raw materials persisted. 
The average annual advance over the period under review was 
only 1.2 per cent, whereas the production of raw materials 
advanced continuously at the rate of 4.7 per cent per annum. 
Thus it is the output of industrial raw materials which accounts 
for the great progress made in these years. 

Such statistical information as is available suggests that the 
^manufacturing industries progressed more rapidly than the 
production of raw materials during the period 1925-1929. The 
available indices of production are given below 1 . They are 
compiled by varying methods and are not strictly comparable 
as between the different countries. 



Table II. — National Indices of Industrial Production. 
(Base : 1925 = 100). 



Countries 


1926 


1927 


1928 


1929 


France 

Germany 

Poland 


116 

95 

98 

103 

77 

139 

117 

104 


102 
120 
123 
108 
111 
164 
125 
102 


119 
120 
138 
104 
105 
198 
138 
107 


130 
122 
138 


Sweden 


127 


United Kingdom ..... 

U. S. S. R 

Canada 

United States 


113 
223 
154 
114 



1 For sources nnd ilulnlls, see 1 ho Statistical Year-Book of the. League of Nations, 
1930 31 and the Menwrantliiin on 1'rotlurllon and Trade, 1 ()25-lf)2»/30. 









— 18 — 

The progress recorded in the years under review was chiefly 
confined to industries manufacturing capital goods and con- 
sumption goods of a new kind and of a higher grade. 

The remarkable growth in the output of iron by some 28 
per cent and of steel by about 33 per cent reflects vigorous acti- 
vity in all the mechanical industries. The engineering trades, both 
mechanical and electrical, increased their output by over a half. 
The manufacture of motor-cars rose by 29 per cent and the 
number of ships launched increased nearly as much, although 
the shipyards of certain countries were not fully occupied. The 
rapid technological change is illustrated by the fact that motor- 
ships accounted for 44 per cent of the total tonnage launched 
in 1929 as compared with 14 per cent in 1923. 

The great increase in the motor-car industry gave a 
powerful stimulus to the rubber manufacturing trade, which 
increased its output by 40 per cent. The output of heavy chemicals 
advanced by at least a third. The advance in the timber as 
well as the paper and printing, industries, although smaller, was 
still considerable — about a quarter. 

Far-reaching changes took place in the technique of heating 
and generating power. These were detrimental to the coal 
trade. In no other major industry was so little progress made 
before 1928 ; the increase of 6 per cent in the output of coal 
and lignite in 1929 was quite exceptional and larger than in 
the five preceding years taken together. The production of 
crude petroleum increased between 1925 and 1929 by 39 per 
cent, but this uninterrupted advance was excessive and the 
stocks in the United States reached unprecedented figures. 
The growth in the production of electrical energy was still greater : 
the advance may be estimated at some 50 per cent in four years. 

The textile industry, as a whole, as well as the leather and 
boot-and-shoe industry presents a striking contrast to the heavy 
industries. A plentiful supply of raw materials at falling prices 
was counterbalanced by a contraction in the demand for finished 
products. The net advance in the output of textile raw materials 
from 1925 to 1929 was only 8 per cent ; and even this rate of 
increase proved too rapid. Its chief branch — cotton spinning 
and weaving — made little progress. The leading European 
exporters of cotton goods were adversely affected by the expansion 
of competing industries in overseas countries — particularly in 
Japan — and, later, by the reduced purchasing power of South 
America and the Far East. The woollen and worsted trades 
could not continue to absorb the growing supplies of raw wool 
coming on to the market and the development of the industry 
was arrested. The flax and hemp trades were unable to maintain 
the level of 1925. 









— 19 — 

The silk industry, on the other hand, showed considerable 
activity and the artificial silk industry continued to gain ground 
from the older textile trades. Indeed, the output of artificial 
silk increased between 1925 and 1929 by some 133 per cent. 
Its relative importance in the whole group of textile industries 
is still, however, small. 

International trade increased more rapidly in 1925-1929 
than in 1923-1925 ; and, as contrasted with preceding years, 
the increase in world trade (19 %) outran the increase in pro- 
duction (II %). Europe, with an increase of no less than 22 per 
cent, regained her pre-war position. As prosperity increased, 
the demand for foreign products and particularly for industrial 
goods rose. Above all, the trade in manufactured articles 
underwent a remarkable expansion. The re-organisation of 
industry in Europe and industrial development in other parts 
of the world caused considerable capital movements, especially 
in 1927 and 1928, and these, in turn, provided a great stimulus 
to international trade. In spite of restrictions on the supply 
in a number of countries which normally export capital, and 
a heavy fall in prices, there was a further increase in international 
trade in 1929. 



B. Changes in Demand. 

During the period under consideration, profound changes 
in the structure of demand were taking place and were calling 
to an exceptional degree for a corresponding adaptation in the 
productive system. Slow changes in tastes and habits are no 
new phenomena, and in the past — more especially in periods 
of prosperity — new demands have arisen and the relative 
strength of old demands has shifted. But the intensity of 
certain of the recent changes has been peculiar. This is partly 
due to the influence of certain new commodities like the motor-car 
on conditions of life, but mainly it is the result of the unpreceden- 
ted increase of productive activity in many parts of the world, 
bringing in its train an unprecedented increase in income. In 
certain countries, State education and social insurance — against 
unemployment, sickness, and old age — have had the effect of 
diverting a part of national income from investment to con- 
sumption. Again, the proportion of persons gainfully employed 
has been rising. In many parts of the world the striking fall 
in the ratio of children to total population and the increased 
employment of women in industry has led to a larger growth 
in family incomes than is shown by statistics of wages and 
incomes per head. And, if the first of these factors has affected 



20 —. 



— 21 — 



more especially the well-to-do classes of society, the influence 
of the second has been largely confined to the wage-earners, 
whose changing standards of living have been largely responsible 
for the changes in relative total demands. 

The change in the age-distribution has been most pronounced 
in Europe. In Germany, children under 15 years of age consti- 
tuted 34 per cent of total population in 1910 and only 25.8 
per cent in 1925. In England and Wales, the corresponding 
percentage was 30.7 in 1911 and 27.8 in 1921 and is estimated 
to have dropped to 25 by the middle of 1928. In many other 
European countries — and more especially in industrial countries 
— a similar tendency niay be observed. Such distinct movement 
cannot be observed for other continents from the results of the 
1910-11 and 1920-21 censuses ; but from the annual figures 
for births and deaths in the last decade it may be safely inferred 
that, in North America and Oceania at all events, a similar 
process has begun. 

Thus, income available for expenditure on objects other 
than the primary necessities of life has been growing rapidly.. 
Taste and leisure have been indulged and the offer of novel 
products, which enhance the comforts and amenities of life, 
has met with a ready response on the part of the consumer. The 
diet of the Western countries is becoming lighter and more 
varied, more expensive, more adapted to the needs of a society 
in which manual labour is diminishing in importance. There 
has been a relative decline in the world consumption of cereals 
and a heavy growth in that of fruit, dairy products and some 
of the " colonial goods ". Cotton and wool have been giving 
place to silk and artificial silk. Lighter and finer clothing is 
now required. Motor-cars, wireless sets, gramophones, electric 
appliances of all sorts, creating and satisfying new demands, have 
gradually permeated the world's markets. 

But such generalisations as these naturally require many 
qualifications. In countries in which Western customs do not 
prevail or in which the conditions mentioned above have been 
wholly or largely absent, indications of change are either incon- 
clusive or else, point to a different movement. The conclusions 
set forth above do not apply to the years of reconstruction 
immediately following the war. In certain countries — Ger- 
many, Austria — in which a large proportion of the popu- 
lation was living under starvation conditions at the end 
of the war, economic recovery was at first accompanied by a 
heavy rise in the demand for the prime necessities of life. But 
later the development in these countries seems to have been in 
the same direction as elsewhere in Europe. The changes have 
not been universal. Shifts in the relative demand for certain 
foodstuffs which profoundly modified the condition of vurioiiM 






branches of agriculture did not obtain over a large part of the 
globe. 

What is of importance, however, is not that demand failed 
to change uniformly in all countries, whatever conditions prevailed, 
but that broadly similar conditions in a large number of countries 
did lead to certain extraordinarily uniform changes in consumption 
and that these changes were calling for a constant re-adaptation 
of the world's productive system. 



Total food consumption per head is highly inelastic. In 
the United States and the United Kingdom, the average con- 
sumption of food per head, by weight and by calory, was very 
little higher three or four years ago than in the years before 
the war. When physiological needs for food have been fully 
satisfied, not more food but a greater variety and finer qualities 
of food are required. But habits of diet alter slowly and the 
changes in relative demand for different foodstuffs "noticeable 
since the war had, to a considerable extent, begun to operate 
long before. Secular movements, in many countries checked 
or arrested by the war, resumed their normal course or were 
accelerated. This is particularly true of wheat. In the United 
States, the per capita consumption of wheat flour has long been 
\ declining, as the following figures show 1 : 



1889 



Wheat-flour consumption 
per head in the U.S.A. 
(in lbs) 223.9 



1899 



1909 



1919 



1929 



222.2 209.7 195.4 175.2 



It is estimated a that the consumption of wheat per head 
(excluding quantities necessary for sowing) in the world as a 
whole fell about 4 per cent from the last years before the war 
to the period 1925-1930. The increased consumption of bread 
in certain Asiatic and African countries, and the gradual subs- 
titution of wheat for rye bread in many parts of Central and 
Eastern Europe, have been more than offset by the very striking 
fall in Western Europe, Oceania and the American continent. 

Some of the major changes in the position of other foodstuffs 
may also be briefly indicated. The world production of meat 
was by 1927 over 15 per cent and by 1928 over 20 per cent 
above the 1913 level. World population had risen by 
about 10 per cent in the same period. The consumption of 



1 Figures published by Uie United States Department of Commerce. 
* League of Nations: Report of the Economic Committee on the Agricultural 
Crisis, 11)31. 



— 22 — 

meat has of course not increased uniformly in all countries. 
In the United States, something approaching saturation point 
appears to have been reached, for there was a steady decline 
per capita between 1924 and 1928. On the other hand, in certain 
European countries, where meat consumption was heavily 
reduced during and immediately after the war, there has since 
been a rapid return to approximately the old demand. In 
Switzerland, for example, meat consumption per head fell from 
42 kilos in 1913 to 25 in 1921. It rose uninterruptedly to 41 
kilos per head in 1929. This factor — the return to old habits 
of consumption after the war — has been of considerable 
importance. The huge increase in German imports of coffee and 
cocoa after 1920 was obviously of a different order from the 
corresponding increase in demand in the United States. It 
gave no necessary indication of a long-time trend in the change 
of demand. 

For the United Kingdom, detailed figures are available which 
show the changes in consumption per head from 1913 to 1928. 
The increase for animal foods is striking. Fruits, tea and tobacco 
were also consumed in much larger quantity than before the 
war, while the consumption of beer declined almost to half 
its pre-war figure. For potatoes and sugar the change was 
insignificant. 

Table III. — Home Consumption per Head in the United Kingdom. 1 

(Lbs.) 



1913 



1928 



1913 



1928 



Butter 


9.9 


14.6 


Beef 


22.2 


33.1 


Margarine . . . 


3.7 


2.7 


Bacon and ham 


13.7 


23.1 


Cheese . . . . 


5.5 


7.3 


Tea 


6.7 


9.2 


Coffee 


0.6 


0.77 


Tobacco . . . 


2.1 


3.1 


Eggs (number) . 


56 


69 


Beer (gallons) . 


27.9 


16.2 


Dried Fruit . . 


4.8 


6.1 









The scanty information available for other countries gives 
evidence of a similar tendency. The consumption of milk, 
fruit and vegetables seems to have risen continuously in the 
United States. 

Contrary to the development in the United Kingdom, mar- 
garine consumption seems to he growing in certain countries, 
as shown by the following figures : 



1926 


1928 


2.12 


2.46 


20.7 


22.0 



1 Statistical A bstract for the United Kingdom. In 1913, including Ireland ; 
In 1928, only including Northern Ireland. 



— 23 — 
Table IV. — Consumption of Margarine 

1913 

U. S. A. (lbs) 1.45 

Denmark (kgs) 15.6 

It is worth noticing that the rise in the consumption of mar- 
garine in Denmark and its high level have been accompanied 
by a decline in the consumption of butter, in spite of a consider- 
able improvement in the standard of living. 

The market for coffee has expanded comparatively slowly 
since the war. On the other hand, the world consumption of 
sugar has risen dramatically by 70 per cent between 1920-21 
and 1928-29. There was a rise in per capita consumption in 
almost all countries — 17 per cent in Denmark between 1923 
and 1928, nearly 20 per cent in the United States between 1919 
and 1927. The consumption of cocoa has also been growing. 
Imports of crude cocoa into the United States rose from 64,300 
metric tons in 1910-14 to 156,000 in 1922 and 230,000 in 1929. 
The habit of eating and drinking chocolate has, of course, 
been enormously extended. 

In many parts of the world — especially in America and 
Western Europe — there has been a pronounced shift in demand 
away from those foodstuffs which require much preparation at 
home. Canned products, ready^cooked meats and vegetables 
are being eaten far more even than ten years ago. 

An examination of the demand for industrial products shows 
that it is the huge growth in the consumption of these products 
generally, and not changes in the relative demand for various 
kinds, which is most striking. Rising incomes mean that a decli- 
ning percentage is spent on food and an increasing proportion 
on other commodities. Moreover, habits of consumption have 
been revolutionised by the introduction of certain recent inventions 
— motor-cars, the aeroplane, wireless, gramophones, cinemas, 
etc. This revolution, which has affected to a greater or less 
extent all classes of society in all parts of the world, is one of the 
outstanding phenomena in the social history of the decade 
preceding the present depression. Only some very brief indica- 
tions of the growth in the demand for these new industrial products 
can be given here. 

Motor-cars, excluding lorries, registered in the United States 
rose between 1919 and 1928 from about 7 to 21.4 millions and in 
the United Kingdom from 260,000 to 998,000. The total number 
of cars in the continent of Africa rose from 189,000 at the end of 
1926 to 347,000 at the end of 1929. In Asia, the corresponding 
relative increase was almost identical. In the United States, 






— 24 — 

there were 60,000 wireless sets in use at the beginning of 1922 
and 7,500,000 six years later ; a similar increase has occurred 
in other countries as seen from the following table : 

Table V. — Number of Radio Sets. 1 
(000's omitted) 



Germany 
Great Britain 
Italy . . . 
Russia . . . 
Australia . . 
Japan . . . 



1924 


1927 


May 1931 


500 


2,000 


3,822 


1,100 


2,500 


3,734 


— 


41 


192 


— 


200 


554 


65 


260 


329 


5 


258 


730 



The construction of residential buildings, meeting the demand 
for bathrooms and modern household appliances, has been 
proceeding apace. The value of electrical household appliances 
produced in the United States in 1914 was less than $3,500,000. 
By 1927 it had risen to $77,500,000. 

Amusements, intellectual and other, and sport absorb more 
and more of the time and money of the community and a number 
of . industries — manufacturing articles of sport, publishing, 
building, the cinema - — have prospered greatly thereby. North- 
American and European films have penetrated to all parts of 
the world. 

Almost all consumers' industries have felt the influence of 
increased demand in the period under consideration; but there 
have been certain important exceptions. The staple textiles have 
been seriously depressed ; cotton and wool have lost ground to 
silk and artificial silk. In the cotton and wool industries, those 
sections which produce medium- and cheap-quality goods have 
been the most seriously affected. The relative development of 
the production of these industries has been briefly touched 
upon in the last section. 

While the consumption of cigarettes has increased enormously 
in all parts of the world, the demand for cigars and pipe tobacco 
has in general declined. The production of cigarettes increased 
by 50 per cent in the United States between 1919 and 1925, 
that of cigars and pipe tobacco fell 8 and 13 per cent respectively. 
Similar charges are recorded elsewhere. 

The above observations on the changes in demand in the 
post-war period lead to the conclusion that not only were 



1 Source : 
or fistlmiilc. 



Union Internationale de Radio-diffusion, Geneva. Nearest census 



mm 



— 25 — 

the changes very considerable, but a large part of the new demand 
was much less stable than the old. The satisfaction of more 
secondary needs had come to play a much larger role than before 
the war, and the character of these needs and the goods and 
services required to satisfy them are likely to shift more easily. 
Hence, the task of balancing consumption and productive 
capacity would appear to have been more difficult than before 
the war ; and it is probable that some maladjustments from 
this source existed in 1928 and 1929 (compare Chapter II). 



C. Financial Conditions. 

1. Monetary Systems and Capital Markets. 

After the war, the currency systems of the world were seriously 
disorganised and unable to stand the severe strain resulting 
from the financial difficulties which prevailed during the 
first years of peace. Hence, price levels and exchange rates 
fluctuated violently everywhere. A very serious decline in 
wholesale prices in 1920-21, which appears to have started in 
Japan, spread to all those countries which were trying to maintain 
a more or less fixed exchange rate on the dollar. In other coun- 
tries, a continuous policy of inflation was pursued and the value 
of their currencies in terms of dollars declined rapidly. Finland 
alone chose an intermediate policy of maintaining a relative 
stability in internal purchasing power while abandoning 
the stability of the currency in terms of foreign exchange. Its 
wholesale price level has remained almost unchanged since 1920. 

Gradually, however, conditions became more settled. Ex- 
change fluctuations became less violent, as is shown in the follow- 
ing table which shows in how many of the thirty-six countries 
considered the difference between the lowest and highest quota- 
tion of the dollar was not over 10 or 20 per cent of the lowest 
quotation : 

Table VI. — Fluctuations of the Dollar Exchange. 1 

Year Not over Not over 

10 per cent 20 per cent 

1921 1 country 6 countries 

1922 8 countries 15 » 

1923 11 » 15 » 

1924 12 » 22 » 

1925 21 » 26 » 



1 Source : Memorandum on Currency and Central Banks, 1913-1924 and 1913-1925. 



— 26 — 

After 1922, the dollar exchange was kept relatively stable in 
sevewd countries, and two years later the gold standard was 
introduced in Sweden and the gold exchange standard in some 
other countries. A large number of others followed the example 
of the United Kingdom in 1925 and returned to the gold standard, 
or carried out a de facto stabilisation of their currencies in relation 
to gold. 

In Central Europe, inflation had proceeded much more 
rapidly than elsewhere. In some of these countries, the 
currencies had lost practically all their value. The whole 
of their economic life was dominated by this fact. Thus any 
re-organisation of their monetary systems was extremely difficult. 
With the assistance of the League of Nations such a re-organi- 
sation was, however, carried out successfully in Austria as 
early as 1922, and in Hungary in 1924. The stabilisation of 
the German currency in 1923-24 was accompanied by the 
drawing-up of a plan — the Dawes Plan — for a reparation 
settlement. An international loan of 800 million marks, floated 
successfully in the autumn of 1924 on the basis of the plan, 
was an outstanding event in post-war financial progress. 

After 1925, currencies were kept fairly stable, even in coun- 
tries where the currency had not been legally stabilised on 
gold. But in Belgium, France and Poland inflation continued, 
and the currency depreciated. Here also the next two years 
saw a re-organisation of the monetary systems, following upon 
drastic financial reforms which turned deficits in the public 
finances into surpluses and thus reduced the Governmental 
demand for advances from central banks. France and Belgium 
chose to return to the gold standard on a basis which did not 
make a deflation of their domestic prices necessary. Their indus- 
tries thus escaped the hardships of deflation, whereas industries in 
Italy, Denmark and Norway had once more to face the difficulties 
which they had encountered during the period of deflation in 
1920-21. The various ways in which the return to the gold 
standard was carried out exercised considerable influence in 
subsequent years upon the economic life of the countries concerned. 
As the most important South-American countries stabilised 
their currencies at about the same time as France, the great 
majority of the world's monetary systems had been restored to 
order by 1928. Even in countries like Spain, where a paper 
standard still prevailed, that year marked a comparatively 
quiel period, without important currency disturbances. 

One noticeable factor in post-war monetary development, 
which will be dealt with later, was that gold was almost conti- 
nuously flowing to the United States. Here again, however, the 
years 1927 and 1928 brought more normal conditions ; during 



27 



thirteen months of these years considerable amounts of the surplus 
gold in the United States moved to other countries. 

In most countries the re-organisation of monetary systems 
went hand in hand with a consolidation of the capital markets. 
As State budgets came to be balanced, one important source 
of demand for credit disappeared and rates of interest tended 
downwards. This tendency was more pronounced for short- 
term rates than for long-term rates. Compared with pre-war 
times, the supply of short-term credit was apparently increasing 
more rapidly than the supply of funds available for long-term 
investments. 

It is probable that the need for short-term banking credits 
for the financing of trade and production was smaller than 
before the war. Manufacturers keep smaller stocks of raw 
materials, and traders of finished goods. A more rapid turnover 
of operating capital has been achieved in manufacture by improved 
technique. Sales on credit by producers to traders, among 
traders themselves and by traders to retailers were less popular. 
Instalment selling, which grew in favour, was largely financed 
not through direct bank credits but by special financial companies 
through the sale of finance paper. Mergers, combines and chain 
stores eliminated small firms, replacing them by large corpora- 
tions. These preferred the more permanent method of raising 
money on bonds and stocks in order to finance their business. 

On the other hand, the demand for long-term credit was 
considerably higher. This was due to extensive borrowing by 
Governments and to a serious need for capital investment in 
order to repair the devastations of the war and to finance new 
inventions. Thus, for intance, the general spread of motor-cars 
called for new and more expensive roads and the so-called 
" rationalisation " movement demanded a larger permanent 
capital for the equipment of plants. 

This intensive demand encountered less readiness on the part 
of lenders to supply capital for long-term investment. Lack 
of confidence in the stability of currencies, reluctance to accept 
a lower interest rate than that to which they had grown accus- 
tomed, unfortunate experiences of loans lost abroad, and other 
factors contributed to this attitude. As a result, long-term capital 
was scarce and rates were higher than they had been for many 
years before 1913. 

These conditions naturally influenced the credit policy of 
private banks. In many countries long-term credits grew in 
relative importance and time deposits tended to increase more 
than sight deposits. 

The high interest rates for long-term loans did not seriously 
handicap those enterprises which were able to procure funds by 



— 28 — 

issuing shares, the prices of which showed a strong tendency to 
rise, as will be seen in the following table : 

Table VII. — Index Numbers of Industrial Shares. 1 



Yearly average 


Germany 
1924-1926 


Swlt zerland 
Nominal— 100 


United 
Kingdom 


United 
States 




= 100 




1924 = 100 


1926 = 100 


1924.... 


101 


124 


100 


70 


1925.... 


93 


138 


109 


88 


1926.... 


106 


167 


115 


100 


1927... 


154 


201 


124 


118 


1928.,.. 


142 


247 


142 


154 


1929.... 


126 


236 


139 


189 



The growth of speculation had some disquieting aspects. 
But, on the whole, the period up to 1928 restored monetary 
systems and capital markets to a more normal condition. 

In view of their unfortunate effect upon the present depres- 
sion, it is necessary to describe the changes in international 
capital movements after the war rather more fully than the 
subjects hitherto treated. A short analysis of the pre-war 
situation will afford a background. 

During the half-century before the war, international move- 
ments of capital expanded very rapidly. A continuous flow 
of long-term capital from Western Europe to the rest of the 
world took place, though not of course without, heavy fluctuations 
from year to year. It has been estimated that by 1914 the total 
capital investments of Great Britain amounted to $18,000 million ; 
the net foreign assets of France amounted to almost half that 
figurc_ ($8,700 million), while the corresponding German figure 
was $D,600 million. It is not too much to say that the building-up 
of modern industry and transport in most of the important 
areas outside Europe was made with the help of European capital 
and could not have been done with anything like the same speed 
without it. This holds true also of the development of the 
United States, which in 1914 had borrowed something like 
85,000 million abroad. Considerable exports of American 
capital to other countries had brought the total foreign assets of 
this country up to more than $2,000 million ; thus the net debit 
of the United States amounted to something like $3,000 million. 



• Source : Statistical Yew-Book of Ihc League of Nations, 1830-31. 



— 29 



The manufacturing industries of the lending nations had adapted 
themselves to these conditions of a continuous outflow of capital, 
and had built up a capacity for producing manufactured goods 
which-could only be sold in sufficient quantities as long as the 
export of capital continued. In exchange for some of these 
manufactured commodities, foodstuffs and raw materials were 
imported, the production of which had become possible largely 
owing to new transport facilities having been created with the 
help of European capital. 

Short-term capital movements were different in character. 
There was no regular flow from Western Europe to the rest of 
the world. On the contrary, these movements went backwards 
and forwards as conditions changed ; they acted as a kind of 
" compensation balance " in international economic relations. 
Short-term capital was also used to finance international trade 
from London, the monetary centre of the world. Although 
the total capital employed in this way was considerable, it 
was small compared with the amounts involved in the long-term 
movements. 

The war changed all this. Europe sold most of its American 
securities back to the United States and contracted new loans 
on a large scale. Russian bonds became valueless. These 
and other factors reduced the foreign assets of European lending 
nations and turned the United States from a borrowing into a 
capital-exporting country. In 1920, its net foreign assets, exclud- 
ing the Inter-Allied debts, reached the level of about $6,000 
million. British foreign assets had been reduced by a fourth, the 
French had fallen by more than half : in 1920 France was 
still a capital-importing country. The larger part of the German 
foreign investments had been sold or lost during the war and 
through the Peace Treaties. 

Great Britain quickly resumed her position as an international 
lender on a large scale, and the United States continued to 
invest large sums abroad, chiefly, however, outside Europe. 
As monetary and political instability was unfavourable to the 
issue of long-term loans, the most urgent needs of the majority 
of European countries were met largely by short-term credits. 
Certain countries exporting primary products in Latin America, 
Asia and Oceania were more successful in borrowing on long 
term. The new capital issues floated in the United States for 
the account of Latin America rose from $34 million in 1913 to 
$230 million in 1921 and $224 million in 1922. In the following 
years, however, prices of foodstuffs and raw materials 
gradually rose in comparison with prices of manufactured 
goods, and countries exporting these products were able 
to reduce their demand for credit to some extent. Thus 



— 30 — 

more capital became available for other borrowing countries. 
Moreover, France had begun to export capital in 1921. Never- 
theless, several of the countries suffering most from the scarcity 
of capital were still excluded from the international markets 
for funded capital owing to their unstable political and monetary 
situation. They were forced to continue borrowing on short 
term. On the whole, however, the years after 1920 saw a 
considerable expansion of capital movements which were, in 
general, different from those which took place before the war. 
When the German reparation problem had been settled with 
the Dawes plan in 1924, a new period of further expansion opened. 
The Dawes loan was the first of a series of large bond issues 
whereby Germany absorbed more foreign capital than any other 
country during the next four years, and from being — apart 
from her reparation liabilities — a creditor country, became, 
in 1929, the most heavily indebted country in the world after 
Canada. 

Several countries other than Germany, which had previously 
been to a large extent excluded from the international capital 
market, went through a similar experience after the stabilisation 
of their currencies. Up to and including 1924, the bulk of new 
loans floated in the United States for European account was 
raised by capital-exporting countries which were re-lending, 
chiefly on short term, to countries which were unable to raise 
long-term loans. As the following comparative table shows, 
the issues on the New York market which were taken over by 
the United Kingdom, France, Belgium, the Netherlands, Sweden 
and Switzerland, were lower, absolutely as well as relatively, 
than the total European issues after 1924. 



Table VIII. 



Distribution of European Issues in the United 
States of America. 

$ (000,000's) 



Issues for the account of 


1921-1924 


1925-1928 


B. Capital-exporting 

European countries .... 

C. B as percentage of A 


1003 

621 
62 


2289 

258 
11 



Even during the latter part of the period under review, 
however, certain countries in Europe, among them Poland, 



— 31 — 

Roumania, Yugoslavia and Bulgaria, could only borrow to a 
very limited extent on foreign bond markets. 

Another interesting change in the capital movements of 
these years deserves mention. During the period 1920-1925, 
the vast majority of the new capital issues for European account 
went to Governments and municipalities, whereas from 1925 
onwards issues for industrial enterprises became increasingly im- 
portant. Foreign capital was thus being employed to a greater 
extent than in previous years directly for the development 
of industrial production. 



Table IX. — Net Export of Capital 1923-1929. 
$ (000,000's). 





U. S. A. 


U. K. 1 2 


France * a Canada ' 


1923... 
1924... 
1925... 
1926... 
1927... 
1928... 
1929... 




130 
538 
586 
92 
517 
1,036 
233 


700 
380 
261 
—29 
482 
667 
672 


504 
235 
-29 


44 
107 
277 
173 

51 
164 
-87* 


Total . 


2,872 


3,133 


— 


729 



Information about the magnitude of capital movements 
is unfortunately scanty and somewhat inaccurate. The pre- 
ceding and following table give estimates for net exports and 
imports of long- and short-term transactions for countries 
showing the largest movements. The United States and the 
United Kingdom invested abroad approximately the same sum 
during this period — somewhat more than $3,000 million. Germany 
and Australia were the leading borrowers. 



1 Indirect estimates, calculated on the basis of figures relating to merchandise, 
gold and services. 

2 The figures exclude Government capital transactions. 

11 The figures exclude amortisation of Inter-Allied debts. 
4 Ncl import of capital. 



— 32 — 

Table X. — Net Imports of Capital 1923-1929. 
$ (000,000' s) 





Japan 


Australia ' : 


Argentine 3 


Germany l 


1923 .... 


_ 


187 


32 




1924 










226 


220 


j 85 5 


421 


1925 










74 


110 


866 


1926 










128 


170 


31 


169 


1927 










— 


257 


134 


1,090 


1928 










54 


193 


131 


1,017 


1929 










— 25 4 


166 


38 


567 












— ■ 


1,303 


451 


4,130 



One important aspect of capital movements in these years 
is that not only short-term, but also long-term, capital moved 
in cross-currents. The same country would both import and export 
large sums. Available figures, however, exaggerate the amounts 
invested by other countries in the lending countries. The move- 
ments of securities backwards and forwards are responsible 
for the high capital import figures in these countries 6 . 

Some impression of the geographical distribution of the British 
and American "foreign issues " can be obtained from Tables I-III 
in the Appendix. According to the figures there shown, the 
European share of the United States and British issues for foreign 
account fell from 46 per cent in 1925 to 39 per cent in 1928. 

These international capital movements helped to reduce the 
discrepancies between interest rates in different countries. The 
price of long-term capital in most countries fell, but the decrease 
was as a rule less pronounced for lending than for borrowing coun- 
tries, in ' which rates were on higher level. A contraction of 
the spread between short-term money rates took place simulta- 
neously. During 1926, 1927 and the early part of 1928, they fell 
in most borrowing countries. In lending countries, other than 
France and Belgium, where rates were dominated by currency 
conditions, rates increased slightly. 



1 Indirect estimates calculated on the basis of figures concerning merchandise, 
gold and services. 

2 Economic years July 1st- June 30th. 

3 Economic years October lst-September 30th. The first year is October 
1922-Sepl ember 1923. 

1 Net. exports of capital. 

■ Average Tor the two years 1923-24 and 1924-25. 

" See puge 1 15. Memorandum on International Trade and Balances of Payments, 
11)27-11)211, Vol. II. 



• 






— 33 — 

This movement in the direction of an international equalisation 
of money rates came to an end in most countries towards the 
middle of 1928 — that is, at the beginning of the boom in the 
United States which culminated one year later. (See table in 
Chapter V — C.) In the case of Germany and Austria, the fall in 
money rates had been arrested earlier and an upward movement 
had begun. It was followed later in the year by a somewhat 
smaller increase in other European rates, and indeed those of 
all Central and Eastern European countries, e.g., in the United 
Kingdom, the Netherlands and France. A reaction took place 
in most countries early in 1928, but German and Austrian rates 
remained — and have since remained — far above those of the 
lending countries. The German minimum open-market rate, 
which during the first quarter of 1927 coincided with the British, 
was about 1 % per cent higher during the last quarter ; one year 
later the discrepancy had risen to 2 per cent. 

The price of long-term capital in Germany was affected 
in the same way as money rates. Quotations of bonds of nearly 
all other countries, borrowing as well as lending, rose in 1927 
and reached a peak in 1928 (that is, actual bond yields were 
at a minimum) ; but in Germany the maximum bond prices 
and the minimum yields were reached about one year earlier. 

Table XI. — Actual Percentage Yields of Certain Bonds. 





Germany 


U. S. A. 


U.K. 


Roumania 




Misc. bonds 


60 prime 


Consols 


Govern. 




S % and less 


bonds 


2y.% 


bonds 


Dec. 1926 


7.6 


4.6 


4.6 


12.4 


Feb. 1927 


— 


4.5 


4.6 


11.4 


May 1927 


7.0 


4.5 


4.6 


9.1 


Dec. 1927 


7.7 


4.4 


4.5 


9.8 


June 1928 


7.9 


4.5 


4.5- 


7.5 


Dec. 1928 


8.0 


4.6 


4.5 


8.5 


June 1929 • . 


8.3 


4.7 


4.6 


9.3 



The causes of the increasing scarcity of capital in Germany at 
this early date are not very clear. Certain factors which tended 
to reduce the inflow of foreign capital appear to have been decisive. 
In the first half of 1927, the German loans floated abroad were 
greatly reduced partly owing to the fact that the exemption of 
such loans from the 10 % tax on the yield of capital was withdrawn 
from December 1926 to June 1927. Moreover, certain financial 



34- 



circles were coming to the conclusion that some German borrowings 
abroad were being used unproductively and that public, expen- 
diture was not sufficiently restricted. 

Another factor which undoubtedly had a direct effecl upon 
the supply of capital in Germany and, particularly Inwards 
the end of the period under review, in other countries was a 
change in the character of French capital exports and their 
subsequent decline. For many years previous to 1927 France 
exported a very considerable amount of capital. No direct esti- 
mates are available, but the surplus on account oT French trade 
in goods and services, together with reparation receipts during 
1924-1926, has been estimated to have averaged $500-600 million 
annually. So far as is known, only a comparatively small propor- 
tion was utilised for purchases of foreign long-term securities or 
directly invested in permanent businesses abroad. The bulk was 
lent on short term. France was, indeed, borrowing considerable 
amounts abroad on long term, but lending on short term. 

The surplus of capital in France appears to have been almost 
as large in 1927 as in the preceding few years ; but the stimulus to 
short-term investment abroad was largely removed when the franc 
was de facto stabilised at the end of 1926 and exports from France 
changed in composition. The French Government debt to the 
Bank of England was settled, involving a payment of $160 million 
or not far from a third of the whole French capital export in 1927. 
Capital issues in France for foreign account rose, and at the 
same time loans floated abroad for the account of France fell off. 
Although the latter tendency continued in 1928, the French net 
export of capital that year was reduced by roughly one half. A part 
of the French floating assets abroad were used for gold purchases 
in connection with the legal stabilisation of the franc. These gold 
purchases continued in the following year and the foreign exchange 
reserves of the Bank of France fell by some $260 million, largely 
on account of withdrawals in the first half of the year. On balance, 
there seems to have been a small net import of capital into France 
in that year. 

Around 1928 the situation with regard to capital invested or 
borrowed abroad by certain important countries was the following. 
On long term the United States had a credit of $14,000 - 15,000 
million and a debit of about $4,000 million. On short-term 
account the debits were double the credits — i.e., about $3,000 
million. Thus, the net assets reached $8,500-9,500 million, 
excluding war debts, the capital value of which has been calculated 
at $6,000 million on the basis of a rate of interest of 5 per cent 1 . 



1 Sue National Industrial Conference Board : The International Financial 
Position o/ the Untied States. New York, 1929. 



^^^H^^H 



— 35 — 

British investments abroad were considerably larger — something 
like $20,000 million. For France no figures are available, but 
it is estimated that her investments stood at about 60 per cent of 
their pre-war figure. Germany, instead of being a creditor, was 
heavily indebted. Apart from reparations, her net indebtedness 
on long-term account was about $2,500 million and on short-term 
account $1,500 - $2,000 million. 

Looking back on the period before the present depression, it 
will be found that, on the whole, the foreign assets of all lending 
nations were growing and the net indebtedness of most debtor 
countries was also increasing. Long-term capital movements 
were about as large as before the war, but they were much less 
steady ; the cross-currents were more numerous and important 
and the mechanism of international capital movements was more 
complicated. This partly explains why the distribution of the 
world's gold stocks was such as to make the position of many 
central banks very vulnerable. 

The organisation of international finance has undergone 
a profound change, a change the very newness of which has 
involved difficulties and weaknesses at one point or another. 

London is no longer, as before the war, the dominating 
financial market with a controlling influence on short-time capital 
movements and by far the greatest lender on long-term account. 
In 1927-28, New York was almost as important and it was 
clear that Paris, although temporarily handicapped, would soon 
emerge as a serious rival with a considerable capacity to export 
capital, the prime requisite of an international financial market. 
It was inevitable that this new organisation of international 
finance should handle things differently from London before 
the war, when decisive power was concentrated there. The 
three markets had not yet found satisfactory methods of co-opera- 
tion, and the leading financial houses in the different countries 
had different traditions and experience. Moreover, although the 
funds available for export in the United States were at one moment 
or another very considerable, the importance of that export to 
the whole economic system of the country and the apparent 
immediate importance of maintaining a steady flow of capital 
was not so great as in England. Neither the need nor the 
tradition of foreign lending was so strong. In France, the 
tradition had been temporarily broken by the special difficulties 
which she had had to face and by the losses of foreign investments 
from which she had suffered. During this period therefore, 
when many borrowing countries were suffering from a serious 
dearth of capital, the streams available for their irrigation 
flowed, not with persistent regularity, but spasmodically. Not 
a little flowed into wrong channels and was lost. Not a little 



36 — 



was liable to be sucked back suddenly into the reservoirs 
whence it had come. 

The instability of the international financial situation was 
enhanced by the large increase in the proportion of total loans 
made on short-term account. This development was due largely to 
the lack of confidence which created a desire among the general 
public to keep a large proportion of their funds in liquid form. 

The manner in which they were likely to react was less 
easy to foresee and a new element of uncertainty thus arose. 

The insecurity of the position was increased by the fact 
that the very countries whose credit was likely to be most 
affected by political changes had incurred foreign indebtedness, 
partly of a short-time character, on a very large scale. It has 
been estimated that, by the year 1929, Germany had borrowed 
abroad no less than 8,000 million marks or $2,000 million on 
a short-term basis. The existence of large fixed interest charges 
is always dangerous. It is all the more so for countries which are 
likely to be hard hit by a depression or subject to considerable 
withdrawals of foreign short-term capital. Thus the existence of 
an obligation on the part of Germany and some other countries 
in a similar position to pay large sums as interest on foreign 
loans and in reparations could not but contribute to a feeling 
of instability in the world of international finance. Germany's 
obligations were rigid ; but the in- and outflow of foreign capital 
was uncertain. 

For similar reasons, the position of Australia and several 
South-American countries was somewhat unstable. They had 
grown accustomed to a large inflow of foreign capital and 
had a large burden of interest obligations — as illustrated in 
the following table : 

Table XII. — Net Interest owed abroad ( — ) or to be collected from 
abroad (+) per head of the population, 1928, in dollars 1 . 



New Zealand .... —27.6 Norway. . . 

Australia —27.5 Denmark . . 

Canada —22.3 Hungary . . 

Argentine —17.4 U.S.A.. . . 

Union of South Africa —9.8 Great Britain 



+ 



+29.0 



Another reason for instability in the international financial 
relations of certain countries — Australia, the Argentine and some 



1 Source : Memorandum on International Trade and Balances of Payments, 
1IM7-1D29, Vol. II. 



37 

other South-American States — is to be found in the character 
of their international trade. Their exports consist largely of 
raw materials, which are likely to fall heavily in price during 
a period of depression at the very moment when international 
capital movements are apt to change in such a way as to 
put, in any case, a strain on their balance of payments. In 
such circumstances, it is difficult to make a smooth adjustment 
and to prevent a breakdown in the credit structure. 

Taken as a whole, the international financial position in the 
years before the depression was much less stable than before the 
war. 



Chapter II. 

STRUCTURAL CHANGES 

AND INCOMPLETE ADJUSTMENT IN THE YEARS 

PRECEDING THE DEPRESSION. 



A. Crude Food Industries. 

The present chapter deals with certain changes in the structure 
of the economic organism which may have exercised an important 
influence on the character of the present depression. Particular 
attention is drawn lo certain fundamental changes in the economic 
system which had not, around the year 1928, been followed by 
the necessary re-adaptatiou of the various economic elements 
and had consequently given rise to a series of so-called malad- 
justments. Such structural changes and maladjustments exercised 
a double influence. They created an unstable situation, likely 
to be easily upset when attacked by outside disturbing forces — 
as, for instance, a depression in the business cycle. Secondly, the 
changes in the basic elements of the economic structure which 
had begun at this time continued and thus made necessary its 
further fundamental readjustment. As this could only be i ffected 
slowly and with great difficulty, some of the already existing evils 
tended in the following years to become more pronounced. This 
of course would have happened apart from any crisis and would 
have had its own depressing effect on business conditions. In 
fact the structural and the cyclical depressions occurred more or 
less simultaneously and it is not surprising that their combine'! 
effects resulted in a serious economic crisis. 1 

In an analysis of industries producing crude foodstuffs it is 
natural to begin with cereals and to refer especially to wheat, 

1 Sbc Cteftlcc vi - <; below. 



— 39 — 

the principal item in this group of commodities. The somewhat 
abnormal character of the situation is shown by the following 
figures for stocks of wheat during the last decade: 

Table I. — World Slocks of Wheal. 1 
August of each year. Metric tons (000,000's omitted). 



1921 10.2 

1922 10.8 

1923 ..... 11.1 

1924 12.4 

1925 9.3 



1926 10.1 

1927 11.3 

1928 13.4 

1929 21.3 

1930 19.0 



These figures seem to indicate a certain tendency towards 
over-production, especially from 1927 or 1928. In spite of the 
fact that the 1926 and 1927 crops were very light, stocks did 
not fall. 

The total quantity of wheat available for consumption outside 
Russia and exclusive of seed requirements had increased about 
10 per cent between 1909-1913 and 1925-1929. - Comparing 
the average figures for these two periods, the population of those 
parts of the world, excluding Russia and China, which consume 
nearly all the wheat produced, had probably increased by some 
13 percent. The greatest increase, however, took place in South 
America and other countries, where the consumption of wheat 
is lower than in Europe. I f there was over-production, there- 
f ore, it must have been caused by a falling off in demand" 

A closer analysis ol tne tendencies ol supply and demand will 
show that already in 1928-1929 underlying forces were making for 
over-production. This term is taken to mean that total output 
can only be sold at prices which do not cover the production costs 
of the majority of producers or, in other words, a tendency of 
supply to exceed demand at a profitable price. 

The following table, which compares the recent acreage under 
wheat and the yield per acre in different parts of the world 
with the pre-war figures, illustrates the changes in the factors 
influencing supply. 



1 Source : Wheat Studies, Stanford University. 

2 Actes de la Conference Internationale preparatoire de la deuxieme Conference 
mondiale du bl(, Rome 1931, pages 298 ff. 






40 — 



— 41 — 



Table II. — Wheat Acreage and Yield 







hectares (000,000's) 


Yield 

quintals per 
hectare 




l'.Mi'i n 


v.n\ 


192G-29 1 1920 


1 909-151 

12.6 
6.9 
9.9 

13.3 
8.1 
6.6 


1920-29 


Europe 

(ex. U.S.S. 
U.S.S.R. . . . 

U.S.A 

Canada . , . 




29.3 
29.9 
19.0 
.4.0 
3.1 
6.0 


27. 1 

18.6 

21.3 

8.9 

4.4 

6.5 


28.5 

30.4 

23.7 

9.6 

5.4 

7.4 


28.1 
30.6 
24.7 
10.2 
5.7 
8.1 2 


12.7 

7.2 

9.9 

12.4 


Australia . , . 
Argentine . . 


• 


7.1 
8.8 



During the war the area under wheat in Europe declined by 
a fifth, the consequent deficiency in supply being made up 
chiefly by the United States and Canada, where the area in 
1919 was nearly twice as large as in the period 1909-1913. ~ In the 
years fallowing the war, the wheat-growing area in Europe began 
to approach the pre-war level, this movement being very pro- 
nounced in Russia, where the total wheat area had at one time 
declined by a third from pre-war figures. While the United States 
reduced her wheat acreage during the first years after the war, 
other important overseas countries continued their wartime 
expansion. In 1909-1913, the total acreage under wheat in the 
United States, Canada, Australia and the Argentine was 32 
million hectares; in 1926-1929J±_haii_riaen to 46 million hectares. 

The yield per acre, of course, varied less. In TEurope it 
recovered from the low figures which were chiefly due to direct 
and indirect war devastations. In Canada and Australia, it 
remained at a lower level than in pre-war days, while it rose 
considerably in the Argentine. 

The factors which explain these changes in wheat areas and 
yield need some further discussion. 

The first important change in post-war agriculture which it is 
necessary to stress is~the great development of the use of machi- 
nery. Progress had of course been rapid before the war; after it, 
however, new and more efficient machinery was introduced so 
extensively as to change agriculture radically over large areas. 

For grain cultivation in general, and especially for wheat- 
growing, cheap traction power is of very great importance. The 

1 Source : International Year-Hook of Agricultural Statistics, Rome. 
» 1028. 



• 



large-scale introduction of tractors led to considerable reduction 
of power costs in many countries. This was particularly 
true where oil was cheap, labour expensive and rent low. The 
saving was greatest in areas where a single crop like wheat 
predominated and where the harvest required a large seasonal 
increase in the demand for power. The tractor met this demand 
efficiently and cheaply, as it can work unexhausted twenty-four 
hours a day and needs no attention when the season is over. 
In other countries where labour and fodder were cheap, farmyard 
manure valuable, oil expensive, farms small, rent high, and 
farmers conservative, the tractor brought little or no reduction 
of costs. 

Evidently, the tractor influenced costs chiefly in the grain- 
exporting countries with extensive cultivation and only to a 
much smaller extent in the importing European countries. The 
greater use of tractors in the former countries is seen in the 
following table, which shows the sales of American tractors : 

Table III. — Exports from and Domestic Sales of Tractors in 
the United States, 1 in 1928. 

Argentine 4,846 Hungary 1,018 

Australia 4,409 Italy 2,001 

Canada 20,983 Russia in Europe . 4,606 

France 1,289 United States . . . 99,491 

German y 3 ' 046 Total .... 141,689 

Like the tractor, the combine, a machine which reaps and 
threshes simultaneously, has increased enormously in impor- 
tance in recent years. It had been in use since the 1860's, but 
only in dry districts, where climatic conditions permitted simul- 
taneous reaping and threshing. It has in recent years proved 
possible to extend the use of the combine to those sub-humid 
districts where most grain is grown and in which it is often 
necessary to cover the ground twice in order to allow the grain 
to dry before threshing. 

Like the tractor, the combine has reduced costs of production in 
regions where topographical conditions are suitable for it and where 
farms are fairly large. It has had little effect in most wheat- 
importing countries where farms average smaller, cultivation is 
intensive and frequent alternation of crops traditional. Another 
reason for its small influence in the latter countries is that in 
most of them straw, which is left on the field by the combine, 
is a valuable part of the harvest. It is not surprising, therefore, 



1 Source : United States Foreign Commerce, 1928. 



— 42 — 

that the number of combines has increased chiefly in overseas 
counlrics where extensive methods of cultivation prevail. In 
Canada , the number of combines in use was 791 in 1927, 4,341 
in 1928 and 7,255 in 1929 . During the period 192ST339", about 
68,000 combines were sold in the. United States, two-thirds of 
the sales being made in 1928-29. The Argentine bought 3,161 
in 1928 and 6,214 in 1929. Thus, the combine was only just 
beginning to have its effects on large-scale farming overseas 
in the years preceding the depression and had practically no 
importance yet in Europe. 

Besides machinery, new seed varieties and dry -f anning have 
i nade po ssible the cultivation of wheal and other grains in 
t eiTilOHCiT w Iiere ;j_ fe_w years ago it would have been ejJQJlojnicaljy 
i mpossible . The application of scientific methods to the selection 
of seeds and plants is one. of the striking factors in post-war 
agriculture. It had of course begun before the war ; but it is 
only in recent years that the revolutionary effects of these methods 
have begun to appear and it seems probable that their influence 
will grow in the future. A few examples of the important 
improvements made may be mentioned. The vast areas of 
Northern Canada had long been deemed unsuitable for wheat- 
growing because of the short summers which made impossible 
the maturing of known varieties of wheat, although these districts 
are in other respects excellent for the purpose. T he developmen t 
of a variety of wheat which needed only about 100 days, instead 
o f Ian, to reach maturity lias created possibiliti es o f wheat- 
g rowing in these enormous' areas . Before the depression, wheat 
production in these districts was growing rapidly. 

In the western districts of the United States and Australia, 
it was lac k of hu midity which prevented the growing of wheat 
and other grams. New drought-resisting strains have led to 
considerable wheat cultivation at very low costs because the 
combine can be used here to particular advantage. 

While il is a relatively easy matter to produce a variety which 
has, one specific advantage (e.g., early maturity or strength 
of straw), experience has shown it to be a very difficult matter 
to produce a variety which is superior in all respects to those 
already grown. The new varieties have consequently proved 
most useful in such countries where it was important to overcome 
only one main obstacle - - e.g., loo short a summer. Where 
conditions were favourable, as in most European countries, it 
has been much more difficult to find varieties of greater efficiency 
than those already grown. The development of wheat-growing 
in the dry districts has also been much helped by dry-farming i. e. 
I he inaiiitciismee o iM lie f al lows of a n earth mulch thus m aki ng the 
ground sufficiently humid fort h 6 wheat f.imjsmjjn;fol[inviii^r year. 



— 43 



After the war, the use of fertilisers became more general . 
One reason for this is undoubtedly their l ower cos t! Since 192'/', 
the average price has been at or below pre-war levels. Probably 
another reason is that fanners have learned how to use fertiliser s 
to better advantag e! l)n tne wnoic, However, the increased use 
of 'fertilisers is a factor of minor importance in the improvement 
of post-war agriculture. Unlike mechanisation and improved 
seeds, it has meant more in countries with intensive cultivation 
than in the large exporting countries. 

These technical changes, which had only begun to show 
their full effects b efore the depression , implied a fundamental 
change in the structure of cereal cultivation. They tended to 
make it p ossib le for certain countries L a p n i d . ua 1 more and .mace 
g rain at d iminishing cosliTwhilc they reduced the m much l ess in 
t he greate r parr of Europe . Even though in important European 
districts, chiefly in the south, climatic reasons do not prevent 
the use of large-scale mechanical methods, t he smaller size of 
f arms and other social circumstan ces make them of less im portance 
t han in ol her par ts of the._3KQlld, From a long-time point o f 
v iew, the root of the crisis in European grain-fanning seems 
t o lie in this fact . 

The competition of overseas wheat in Europe has heen 
Favoured by the l ow shipping rates preva i ling since the war . 
While the wholesale prices have been much above pre-war 
levels, freight rales have been about the same. Table V in the 
Appendix shows thai this relative reduction in the costs of 
transporting wheat from one country to another was not offset 
by increases in import duties before the depression. In view 
di the substantia] increase in duties on manufactured products 
during the years preceding the depression, it is rather strikin g 
t hat wheat duti f", whrh ar " fairly n- prescntalive o f the dutie s 
o n cereals! n general, were kept practically stab le. Thus. "protection 
was not among tlie tactors which, by stimulating the production 
of cereals, have led to a certain maladjustment in this industry. 

Table IV. — Net Exports of Wheat. 1 
Metric tons (000,000's omitted). 

1909-1913 1926 1928 

Argentine 2.4 2.0 5.3 • 

Australia 1.1 1.4 1.6 

Canada 2.0 6.8 9.9 

India 1.3 0.2 -0.004 2 

Russia 4.1 1.0 -0.2 2 

United States 1.4 3.4 2.1 

1 Source : International Y ear-Book of Agricultural Statistics. 
s Imports. 



— 44 — 

The changes in the production and exports of Russia have 
already been mentioned. In 1928, there was even a small net 
import of wheat. From the point of view of an analysis of 
world prices, it is not necessary to study the variations in domestic 
consumption in Russia, which is centrally controlled. From the 
point of view of the rest of the world, it is Russian exports that 
matter. As Table IV shows, these, were very large before the 
war. After the war, however, Russian exports had practically 
disappeared from the world market and Europe had (urned 
overseas for its supplies. This disappearance of Russia is the 
c hief factor which explains why the in creas e of overs eas whea I 
p roductiini h ad not led' to a lack of bala nce between demand 
and suppl y long Del ore IU28-2U . If is obvious therefore thai 
during the latter years the situation had become unstable. If 
I\u^sm_jjrcxeto_jm4i^^ the balance 

"ii- i , 1 ""' ™ yrl *} markets would he upse t. Russia did not do so in 
lU^S-^y partly necause the Russian crop in those years was low. 
Tins helped to deceive the world as to the real character of the 
situation. As a matter of fact, and as later experience proved, 
Russia was making strenuous efforts to increase its production 
and exports of wheat by the introduction of the same methods 
of large-scale fanning that had been used so effectively overseas. 
The number of tractors rose from about 2,600 in 1924 to about 
31,900 in 1928. The number of combines also increased rapidly. 
These and other factors made possible the appearance o f an 
i ncreasing supply 01 Hussian wheat on the world's mar kets 
il l the full owing years . 

The above analysis of supply conditions in the production of 
cereals tells, of course, only part of the story. It is also necessary 
to discuss briefly the character of the demand . Stocks only 
became swollen after 1927 and even after "thaFdate the growth, 
although in itself considerable, was small relative to total pro- 
duction. Since no organised destruction of stocks look place, 
practically all the wheal produced was consumed, though con- 
sumption per capita was no greater than before the war. This 
seems to indicate a Fairly balanced position, although the growth 
of stocks during the two years preceding the depression was a 
little alarming. This impression of stability and lack of serious 
maladjustments was ill-founded, however. To judge the condi- 
1 ions idler 1929, Hie probable trend of consumption must be 
compared with the probable trend of production as influenced by 
the factors briefly touched upon above. 

Table IV in the Appendix shows that a substantia] decline 
in the use of wheat had been taking place, as already explained 
in Chapter I— B. Similar calculations for rye and rice point 
lo a corresponding change in the consumplion of these 



-45 - 

commodities. A rising standard of living has made people turn 
to more expensive foods. Thus the demand per capita showed 
a tendency to decline, 

It is necessary to take into account, however, that wheat 
is used not only for human consumption but also for the feeding 
of animals. Unfortunately, what quantity was used in this 
way during the period in question is nol known. 

It is probable, however, I hat only a small percentage of the 
world supply of wheat and rye was user! for animal feeding. 
Any substantial increase of this percentage is also unlikely unless 
wheat becomes available at exceedingly low prices. In othe r 
w ords, the possibility of using wheat for animal feeding may 
s erve as an ultimate check on wheat prices during a decline , 
b ut will not prevvnl a drop of prices lo a level below th e costs of 
t he majority of European producers outside of Kus sja. 

This brief study of demand and supply conditions of wheat 
around 1928-29 suggests that t he over-production was relatively 
slight. Had it not been for the diverging tendencies of supply 
andderaand the situation would not have been menacing. The 
world, in fact, seems lo have been at the first stage of a develop- 
ment leading to a lack oT balance between supply and demand. 

Given the tendency towards increasing production in 1927-1929 
at the existing level of prices, over-production and a price drop 
at a not-distant date were to be expected. The demand for 
cereals being relatively inelastic, the fall in price would probably 
be considerable. This situation would continue until it had 
led to a reduction in output, probably through a reduction of 
the wheat areas in certain districts. Such were the prospects 
for the years following 1929, if nothing unexpected intervened. 

One qualification must, however, be added. The demand 
for wheat in some important countries in the first stages of 
industrialisation has been increasing slowly but substantially. 
China's annual net import of wheat in the period 1924-1929 
reached 1,500,000 quintals, while in 1909-1913 there was a net 
export of about a million quintals. Further, 3,500,000 quintals 
of wheat flour were imported, as compared with 750,000 quintals 
in the pre-war period. In the chief tropical countries, the con- 
sumption of wheat flour per capita has risen by aboul 13 per cent 
since 1913. 11 is obviously not inmossible that the future demand 
f rom these sources may heco mesg large ;is In affect fundamentally 
t he situation of wheat in the world mnrkeT So far, however, the 
influence has been slight, and the chances in 1928-29 were that, 
during the next few years, demand from these countries would 
remain small, if wheat prices kept on a level profitable to the 
majority of wheat growers. This demand, therefore, could not 
prevent over-production and a drop in prices. (See Chart 2.) 









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-47 - 

One important aspect of the movement of prices and the 
production of wheat before the depre ssion was that the bumper 
c rop of 1928 did not lead to any consider able drop in prices a nd 
tl vus br o ught about no tendency to a restriction o f wheat-growin g 
iirtKcTfol lowing year. T his tfartly explains wTfy. in spJteoT a 
relatively light crop in 1929, the carry-over was abnorma lly higli . 
( ) f course, flic maintenance" of" p ric es at a fairly high level a fter 
t he autumn of 1 ton Was due to The fact"Th at part o f the cr op 
was withheld from the market and stored . 

Tins policy began in Ca nada in 1927 . partly under the influence 
of new marketing organisations, the Canadian Wheat Pool and 
its associate organisations. The Pool pursued a deliberate policy 
of maintaining prices. At the end of August 1929, it held, or 
had bought for future delivery, 80 million bushels, while the 
total carry-over in Canada was 87 million bushels. The influence 
of this policy on Canadian wheat prices, especially since the 
autumn of 1928, can be seen in Chart 3. 

The policy of the Canadian Pool was, of course, not the only 
reason for the increase in stocks during these years. There seems 
to have been a general expectation that the drop in wheat prices 
which had taken place since 1926 could not continue, and that 
therefore it would be profitable to store wheat for some time 
and sell it, when market conditions had changed. In that wav 
p rices were maintained in the autumn of 1928 , and wheat-grow ing 
was not contracted~~as theToTlow ing table shows. : 

Table V. — Wheat Acreage outside Russia and China : x 
Hectares (000,000's). 

1926 92.3 

1927 94.6 

1928 97.8 

1929 . 96.4 

1930 98.8 



The apparent contraction in 1929 does not mean that a 
smaller area was sown. The crop of that year was noL good, and 
in consequence was in many districts not harvested at all, the 
area affected not being included in the statistics in certain 
countries. For instance, in Argentine the acreage harvested 
in 1929 was 2.6 million hectares smaller than in the preceding 
year. 



1 Irak, Palestine, Syrlo and Turkey are also excluded. 



-48- 



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— 49 — 

The maintenance of prices during the larger part of 1929, 
when the bumper crops of 1928 were put on the market, on a not 
much lower level than in previous years protected the farmers from 
a considerable reduction in incomes. There has been a general 
impression that a crisis in cereal-farming started a year before 
the downward turn of the business cycle in the early autumn 
of 1929. Facts lend little support to this opinion, as the drop 
in prices was largely offset by the increase in volume. Official 
estimates of the total value of crops in the United States and 
Canada show a reduction by only 1 % and 4 % respectively. 
For other countries corresponding estimates are not available 
but the value of the crop of cereals, according to calculations 
based on prices and quantities of the most important of them, 
seems to have increased in Australia, Germany and Italy and 
to have declined very little in the Argentine and France. 

Other facts point in the same direction. For example, in Australia 
where farm products in 1928 accounted for 87 per cent of the 
total export value, the average exports in 1924-1927 were £139 
million, in 1928 £133 million and in 1929, in spite of the drop 
in wheat and wool prices in the last quarter, as high as £124 
million. In Argentine exports, farm products are even more 
dominating, accounting for 95 per cent of the total in 1928 ; 
the annual export value in the period 1924-1927 was $920 million, 
in 1928 $1,030 million and in 1929 $953 million. In New Zealand, 
where exports of animal foods are decisive, and in coffee-exporting 
Brazil (see below), farm incomes in 1929 seem to have been on 
the same level as in the previous year. 

It is impossible to escape the conclusion that, in the ye ars 
i mmediately p receding the, depressio n, tne situation with regard 
t o supply and demand was only ju^^ Tjegnvmiuj to lose its 
s tability . No heed, however, was paid toTlie signals of 
warning and no adjustment attempted. Hence, whether a 
business depres sion had appeared or not, th e world price of 
ce reals wou l d fer taiidv .=-ui, tltts . absence-. jn_jmp- failures .c- 
haye moved downwards . 

So far attention has been concentrated on wheat as the leading 
cereal. The situation has been slightly different for the other 
cereals, of which rye is used for both human consumption and 
the feeding of animals, while oats, barley and maize are used 
mainly for the latter purpose. While the prices of various qualities 
of wheat declined by 10 to 25 per cent between 1926 and 1928, 
the prices of rye, barley and oats rose 20 per cent and more, 
iind maize 30 per cent. 

A certain tendency to a shift in the relative extent of the 
various cultures is noticeable, but only since 1928, when wheat 
prices had begun to drop from the high level of previous years, 



— 50 — 
Table VI. — World Acreage of Certain Crops. * 



1927 in per cent of 1909-13 
1929 in per cent of 1927 . 



Bread Cereals and Rice 



Wheat Rye Hlce 



Total 



115.6 

99.3 



106.5 
95.0 



111.7 
101.2 



112.7 
98.8 





Fodder Cereals and Potatoes 


■ - 


Oals 


Barley 


Maize 


Potatoes 


Total 


1927 in per cent of 1909-13 
1929 in per cent of 1927 . 


104.7 
101.2 


92.7 
117.3 


102.8 119.6 
104.3 104.1 

I 


103.0 

105.5 



The increased production of meat, dairy produce and egos 
turning into pasture areas now under the plough has contributed* 
to re-adjust production to the changed conditions. The con- 
sumption of these commodities had, as has already been indicated 
grown rapidly since the war (cf. Chapter I-B). In the United' 
Kingdom, for instance, consumption per head of beef, mutton 
pork, bacon and ham rose by about 40 percent between 1913-1928* 
Although no world figures are available for animal foodstuffs 
it seems certain thai the supply also increased more rapidly than 
t hat of cereals. However it is not necessary to analvse the difficult 
problem whether a change-over from the production of cereals to 
that of animal foodstuffs could have been effected in certain 
districts on a scale sufficient to prevent over-production of 
the former without, however, unduly depressing the price of 
the latter. The answer to this question would of course have 
depended principally on ; (1) the elasticity of demand •- i e 
whether the volume of animal foodstuffs sold could be increased" 
by a reduction of price; (2) how quickly, given unchanged prices' 
would the demand for animal foodstuffs develop owing to 
growth of population, rising standards of living, etc. There can 
be no doubt that the demand for these products was rapid I v 
growing even at constant prices, and it is quite conceivable 
that a sufficient transfer from cereals to animal foodstuffs might 
have taken place, without seriously depressing prices of the 
latter. Thus it was impossible around 1928-29 to foresee whether 
the necessary adjustment in agriculture implied only a shift 
trom one product to another, which could certainly be effected 

Agrfcultur a e ted ^ "^ baSJS ° f flgUreS fr0m the Inter national Institute of 



— 51 — 

although not without great difficulties — large enough in certain 
mixed farming districts to affect considerably world wheat 
supplies, or whether nothing but a reduction of the food- 
producing population of the world could keep supply on a 
level which made profitable prices possible. 

As a matter of fact, the arrival of a severe depression did 
keep down demand for the more expensive animal foodstuffs and 
did make a shift from wheat growing to the production of other 
foodstuffs still more difficult than it would otherwise have been, 
virtually preventing also any transfer of labour from agriculture 
to other industries. Thus, prices of both cereals and animal 
foodstuffs were depressed to very low levels, as will be further 
described below. 

As the analysis so far has been confined to animal foodstuffs 
and cereals, it is necessary to add something about other vegetable 
foodstuffs, especially sugar and coffee. In the production of the 
former commodity important structural changes had taken place 
during and after the war. The price of raw sugar had fluctuated 
widely, but from 1924 the tendency had been downward, as the 
following table shows. In 1929, the price was only two-thirds of 
the average for the five years before the war. 



Table VII. — Price of Sugar. 1 
(Cents per lb.) 



Y'car 


•lava 


N'im Yfii'k 




Java 


New York 




Whit* 


Haw 




wiiiie 


Raw 


1910-13 . . 


^_ 


2,718 


1925 . . . 


3,412 


2,562 


1920 . . . 


9,712 


— 


1926 . . . 


2,867 


2,568 


1922 . . . 


3,212 


2,977 


1927 . . . 


3,194 


2,959 


1923 . . . 


3,866 


5,240 


1928 . . . 


3,503 


2,470 


1924 . . . 


4,411 


4,186 


1929 . . . 


2,214 


2,001 



In the years preceding the war the output of beet-sugar was 
about as large as that of cane-sugar. The proportion of the former 
had been rising for several decades, but during the war tended 
downwards. The war, which caused a reduction of European beet 
cultivation, stimulated a development of the cane-sugar industry. 
In 1918-19, cane-sugar production reached 75 per cent of the 
world supply and in the following year almost 79 per cent. Beet- 
sugar output had then fallen from 7-9 million tons before the 



' Jiivn, annual average selling price of V.J.P. white sugar. 

New York, open market, price of raw sugar. 

Source : Java, Amstcrdamschc Bank! New York, Wlllel it Gray, 



— 52 — 

war to 3,3 million tons in 1919-1920, while cane-sugar output 
had risen to 13,3 million tons. Then a recovery of the beet-sugar 
industry began and annual output, under the stimulus of increased 
import duties and various forms of bounty, rose to about 
9 million tons or practically the same in 1927-1929 as in 1912-13 
although with a considerably increased area under cultivation' 
At the same time, cane-sugar output continued to grow, touching 
18.3 million tons in 1928-29. Thus the increase in supply of 
sugar, as compared to pre-war days was due entirely to cane- 
sugar which had passed through a technical revolution and had 
reduced costs during the whole post-war period. This progress was 
particularly rapid in Java, largely owing to improved varieties. 
Ihe annual yield per hectare in 1928-29 was almost twice as high 
as in 1919-1921. On the other hand, the cost of production of 
European beet-sugar was higher than before the war. Average 
costs were certainly much higher than the free market price in 
1928-29, and production was maintained and increased only 
through import duties and bounties. Competent authorities agree 
that very little beet-sugar would be produced had it to be sold at 
world-market prices as they w f ere in 1929. 

The measures taken by Governments to reserve the home 
market for domestic production of sugar tended to a progressive 
limitation of the free market. As considerable variations in 
annual output are the rule, this limitation could but increase the 
instability of world-market prices. The existence of large stocks 
made the situation more unstable still. 

Table VIII. — Sugar Stocks. 1 
Month of October, metric tons, (000's omitted) 



ii 



1913. 
1922. 



1,279 
1,214 



in 



1922. 
1923. 
1924. 
1925. 
1926. 



882 

804 

551 

1,230 

1,451 



1926. 
1927. 
1928. 
1929. 
1930. 



1,950 
1,809 
1,880 
2,571 
3,216 



The existence of very large stocks during certain periods 
has been partly due to attempts to maintain prices by means of 
various supply restriction schemes, which have increased output 

I, J C t^'-J "J 1 ! 11 ; st ° cks in United Kingdom, Germany, France, Belgium, Nether- 
lands, United States (parts), Cuba (parts). ' ™ 

(interior) 111 ' St ° CkS '" th6 Sam6 countries as for : and » and Poland and Cuba 
Source : I — Bagot and Thompson. 

II and III — Czarnikov Ltd. 



— 53 — 

and reduced consumption. Protective tariff policies and bounties 
have, of course, worked in the same direction. 

The continued growth of stocks and the low prices of raw 
sugar in the years immediately preceding the depression show that 
output exceeded the quantity that could be marketed at a price 
profitable to the majority of producers. 

The development of this industry since the war and its position 
in 1928-29 offers great similarities with that of the wheat-growing 
industry. The stimulus to production outside Europe given by 
the war, the technical progress which reduced costs only in certain 
regions, the refusal to let prices drop and lead to a restriction of 
output in regions with high costs, the consequent limitation of the 
free world market and the increase of stocks under the influences 
of efforts to maintain prices are aspects common to both industries 
and of importance as affecting their position and prospects in the 
following years. 

The conditions governing a third important world staple 
commodity, coffee, were also to some degree similar. As seen 
from the table below, stocks were accumulated and prices were 
maintained at a level which stimulated an expansion of the 
industry and made production outrun consumption. 

Table IX. — Output, Stocks and Price of Coffee. 





Output 2 (T 


ons : 000's) 


Stocks ' (1 


.000 bags) 


Price 


Year 1 






In Europe 


In interior 


Rio 
de Janeiro 




World 


Brazil 


V. S. A. + 


of Slate of 


Rio No. 7 








Brazil Ports 


Sao Paulo 


Gold. frs. p. 
quintal 


1913 . . 


1,210 5 


795 5 


10,275 





" 


1921-22 . 


— 


— 


8,700 




166.71 


1923-24 . 


1,550 


874 


5,071 


4,592 


238.80 


1924-25 . 


1,402 


850 


5,085 


1,786 


178.67 


1925-26 . 


1,439 


841 


4,571 


2,833 


156.87 


1926-27 . 


1,652 


1,041 


4,720 


3,312 


187.14 


1927-28 . 


2,208 


1,502 


5,729 


11,672 


180.37 


1928-29 . 


1,728 


1,062 


5,383 


8,785 


98.09 


1929-30 . 


1,900 


1,230 


5,593 


21,210 


58.71 



1 From August preceding year to July. 

" Statistical Year-Book of the League of Nations 1930-31. 

July — I lie month with the lowest stocks. London and Cambridge Economic 
Service. Slocks in the Interior of Rio de Janeiro were 1,180 in July 1928. 

* Avuruge. Statistical Year-Book of the League of Nations, 1930-31. (one 
l)HK m 110 ktf.) 

» 1 009- 1 91 4. 



Before the war, heavy annual fluctuations in coffee prices 
were normal and, to mitigate these, producers in Brazil, a country 
which held and holds a commanding position, began to organise 
the carrying-over of a part of an abundant crop to some later year, 
when the crop was smaller. A few years after the war this policy 
was extended to the so-called " permanent coffee defence ", 
which aimed at a maintenance of the price at a " fair " level. 
By withholding from the market an ever-increasing stock as the 
table shows, it was possible to keep prices at an attractive level. 
Production expanded, stimulated by the high price, which made 
coffee-planting very profitable. Not only did the area planted 
increase rapidly outside Brazil — in Colombia, for example, it 
increased by more than one-third between 1926-1928, and in 
Haiti by about one-fourth — but also in Brazil itself the area 
increased 25 per cent in the same period in spite of some attempts 
to counteract this tendency. To continue such a policy for long 
was evidently impossible. A factor which did much to weaken 
the position was that the stocks were financed chiefly by foreign 
loans. If the stocks had been financed by taxes on the coffee 
planters, less money would have been available for new planting, 
boom tendencies in general would have been counteracted and the 
financial position of the country would have been less sensitive to 
changes in the international credit conditions. 

After this brief review of the position of some of the important 
crude-food industries during the years preceding the depression, 
attention will be called to industries producing raw materials and 
half-finished goods. 



B. Raw-Material Industries. 

The situation in the raw-material industries around 1928-29 
was even less clear than that in those producing crude-food 
products. On the whole, output does not appear to have 
increased more rapidly in the years following 1925 than during 
many earlier periods. 

What matters, however, is not the aggregate increase or the 
actual increase in output of each commodity, but the increase 
relative to demand. To some extent, the rising standard of 
living in the countries which consume by far the largest part 
of the world's output of raw materials led to an increased demand 
for finer qualities of goods and for services rather than for greater 
quantities. Under such conditions, the demand for new raw 
materials might well be considerably smaller than when improving 
economic conditions lead rather to an increase in the quantity of 
manufactured goods required. 



— 55 — 

To form an opinion regarding the position of raw-material 
industries in the period preceding the depression it is necessary 
to examine not so much absolute figures of production as the 
fhtures for prices, stocks and unused productive capacity. Here 
Sin the interpretation of facts is difficult. That raw-matenal 
prices were on the whole declining in the years up to 1928 and 
relatively stable in 1928-29 before the depression does not prove 
any tendency towards over-production. Technical progress in 
almost all the important raw-material industries was rapid dur- 
ing this period, and declining prices seem to have allowed the 
earning of fair profits by the majority of producing units. 

The growth of stocks after 192o and especially m 1928-29 
is however, a circumstance favourable to the opinion that a 
tendency towards over-production did exist As, however 
slocks in practically all cases were small relative to annual 
output, a study of such figures alone is far from conclusive. 
The same applies to an analysis of surplus productive ca|M«ty. 
such as was very evident in the case of some minerals. Unused 
capacity is the normal situation, not only m ma»ufaclunng 
industries but also in raw-material industries, and it is difficult 
to determine whether excess capacity during these years was 

above or below normal. , Drmnnv 

One circumstance which seems to indicate a lack of harmony 
between productive capacity and demand during the last years 
before the depression is the influence of monopoly control of 
several important basic commodities. Attempts were made to 
keen prices at a profitable level, without, except in one or two 
S'SrJtionof productive capacity. Hence the effect of 
a period of prices that were fairly high when compared with 
costs was not only to reduce demand - through a larger use, 
for instance, of substitutes — but also to increase productive 
capacity Rubber, copper and nitrates are conspicuous examples. 
This tendency of monopolistic policy to increase capacity in 
relation to demand and thus to create an actual or potential 
surplus capacity in 1929 has many points m common with what 
has happened in the case of wheat and coffee. 

The following observations are intended to convey an impres- 
sion of the position of the more important raw materials during 

1 C In STcase of rubber, both supply and demand are extra- 
ordinarily inelastic. Trees cannot be tapped before they are 
live years old ; consequently, high prices cannot lead to immediate 
increases in output ; low prices, on the other hand, largely fail 
to reduce supply, partly because native producers are not afraid 
or " spoiling the market " but continue to produce and others 
follow their example. The period under review has been domi- 



56 — 



hated by the 
restricted ex 
to very higl 
Chart 4 shows 



le. working of the so-called Stevenson plan, which 
q>orls from Brilish territories. This restriction led 
h prices in 1925 and the two following years as 



it consequently stimulated 



Chart 4. 



g 
new 



planting 



500 











CAOi 


1 1 

VTCHOUC -A 








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Sources : Stocks : iondon and Cambridge Economic Service. 



— 5? — 

and the use of reclaimed rubber. The latter factor reduced 
demand and thus contributed towards the ensuing rapid drop 
in prices, whereas the new planting had no effect on output 
before 1930. In view of the fact that the increased planting 
in 1925-1927 was bound to lead to an increased capacity live 
years later, the situation in 1929 must be regarded as very 
unstable. Slocks were large and had been growing since 1926, 
and as production exceeded consumption in that year by 65,000 
tons, or 8y 2 per cent, some over-production clearly existed. Only 
an increase in demand many times larger than that which had 
characterised the last decade or organised restriction of output 
could have avoided further over-production. 

Cotton and wool prices dropped considerably in 1925 and 
1926, possibly under the influence of changing fashions which 
reduced the demand for cloth. From then until 1928 their prices 
kept relatively stable and fairly high compared wilh pre-war 
days. In 1928, the average price for American cotton in 
Liverpool was 56 per cent and the London price for wool more 
than 100 per cent above the 1913 level. 

Cotton production shows no distinct trend in the five years 
before the depression. Stocks were large, but not larger than 
they had often been before. The conditions of supply seem to 
have been dominated by the activities of the cotton weevil in 
the United States, which reduced the crop certain years to a very 
small ligure. There was certainly no clear evidence of over- 
production or of any tendency in that direction. (See Chart 5.) 

The case of wool was somewhat different. Production was 
rising rapidly — about 30 per cent in six years — and demand 
for woollen articles was continuously increasing. As no reliable 
figures of world stocks are available, it is difficult to say whether 
the high price level reflected a stable position. There is no special 
reason for assuming, however, that stocks were exceptional or 
excessive relative to annual output. 

The price of raw silk declined from 1925 to 1928. Given the 
considerable technical improvements which had taken place, 
the price in 1928 about one-third above the price in 1913 would 
suggest a comparatively favourable situation. The tendency to 
increase output was very strong in the years immediately preced- 
ing the depression. World stocks are not known ; but there is no 
special reason for assuming that output was increasing much 
faster than demand. 

Increased demand for natural silk in a period when artificial 
silk was coming into use more and more affords striking evidence 
of the rapid rise of the standard of living, particularly in the 
United States and Europe. The competition of artificial silk 
seems to have been much less severe than was generally expected 



. 



58- 



Chart 5. 




Sources : Stocks : London and Cambridge Economic Service 

*£?%&£?%^r Be * of the League of Nathns - 



1 Stocks : U. S. A., Europe, floating to Europe, Asiatic mills. 



59- 



a few years earlier. The annual output was probably only about 
2 per cent of the total output of other textile raw materials 
(compared by weight) and, although it was rising rapidly, it could 
not radically change the situation for the other textiles in the 
course of a few years. 

The very favourable prices of artificial silk during the greater 
part of the post-war period naturally led to large increases in 
the capacity of the industry which finally overtook the rise in 
demand. Hence prices around 1928 were falling and a considerable 
surplus capacity seemed probable. Numerous attempts towards 
international regulation of the artificial-silk market did not cover 
sufficient producers to exercise lasting influence on the price level. 

Other organic raw materials of great importance are timber 
and wood pulp. The prices of these products remained at a 
relatively high level during the larger part of the post-war period. 
This was particularly the case with timber, in the market for 
which Russian competition had almost disappeared. Prices in 
1928-29 were 50-60 per cent above the pre-war level. By that 
time, however, Russian exports were increasing fast, although 
from October 1927 to September 1928 the total for timber and 
manufactured wood was 40 per cent below the pre-war figure for 
the territory now comprised within the Soviet Union. In the 
following year it had practically reached the pre-war level and a 
future increase was planned. Even before the depression, pro- 
ducers in Scandinavia had restricted output to counteract the 
effects of the increased Russian supply. It was clear, however, 
that very substantial reductions of production in countries 
other than Russia would be necessary, even in the absence 
of any business depression, if prices were to be maintained on 
a profitable level. 

Pulp prices had also been remunerative up to the depression, 
but it was evident that the increase in capacity in 1928-29 in 
Canada, the United States and Scandinavia, at least as far as 
certain qualities of pulp are concerned, were so rapid that a 
"corresponding increase of demand at existing prices was impro- 
bable. 

The evidence pointing towards the existence of over-produc- 
tion or excess capacity in the case of inorganic raw materials is 
more conclusive. 

The coal industry, more especially in Europe, was subject 
to a complex set of influences which tended to restrict demand 
within surprisingly narrow limits and to create very con- 
siderable local excess capacity. 

Output was increased in certain European countries and 
declined in others under the influence of the new frontiers, the 
German reparation payments in kind, technical development, 



— 60 — 

reconstruction of destroyed mines in France, etc. But the 
demand for coal remained stable in the post-war years as agai t 
a pre-war annual increase of 4 per cent. The output of lignie 
did however, grow considerably. This relative retrogression of the 
most .mportant source of power, in spite of the great expansion 
of manufacturing industries, is of course to be expIainedTv he 
growing use of other sources, such as oil a „d water It has been 
calculated that the increased use of these two sou rce of enc m' 
for purposes where coal would have been used before the war 

annual' *lL% *ST? I™ th ° . ,ailer h >' 20 ° millio » *"£ 
annually Further the technique in the use of coal was much 

improved and considerable economies effected. The nrice of 

coal varied a great deal from country to country, owing to the 

ra eTThf T" d . Uti * subsidies^ differential transport 
rates. The export prices were low compared with costs of pro- 
duction in most mines. Nevertheless, supply was maintained 
par l y because mines deteriorate rapidly if they are not worked 
partly because of the artificial stimulus afforded by GovernmenU 
and coal cartels. But the productive capacity of several countries 
was not fully utilised Monopolistic regulation of coal inTke s 
wS ™ considerable, did not succeed* in stabilising conditions' 
from a world point of view. 

Mineral oils of course developed in an entirely different 
maimer In contrast with that of coal, the output of mine al o s 
increased over 100 per cent from 1920 to 1929. Many new o - 
fields were discovered and developed and technical progress was 
rapid hor instance, the new » cracking " process raised the 
percentage of benzine obtained from oil by 50 per cent 
spite of the large influence of certain international « ncer 1 
production tended to exceed demand at existing prices It 
proved exceedingly difficult to restrict output, as new wells' were 
opened up and worked even when prices were low Further 
wel -owners were afraid to stop production, as oil might be 
drained of by another well in the' same field in he neigbbotfrhood 

?nT™ ,dh h-. ad - ri8 ^ l o P l ° tlW Spri,, « ° f 1926 ' declined n 1927 
and 1928, while in 1929 a slight advance occurred. The level 

of prices m these years was considered low, but, in view of the 

wiT^ ™P r T ment m thc tech " i( T ue «f production R 
would be unwise to assert that the industry was definitely 

d^Tfw2 °r r - ?r °i l,Ctia , n - Stocks w " somewhat trgl 
durmg the whole period and increased considerably in 1829 

«iJS?Jf?H T °{ C T P f is iII,,strat ed by Chart 6. In 1929! 

ran idtv fait C L Ur t St °^ S WerC l0W and ' irices «" mounting 
rapidly facts which would seem to indicate the reverse of ovcr- 
producUon, though they do not preclude the existence of "a 
large surplus capacity. In 1926, Copper Exporters Incorporated 



61 



Chart 6. 





Ml 


1 ' 1 






/ 






CU/VRE -COPPER 






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/ 


















' 
















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rg4S 


5 Si 


















Hi 
0«S 



































1972 1973 1924 1925 1926 1927 1926 1979 




■ ' r .-- /' 



Sources : Stocks : London and Cambridge Economic Service. 

Production : Statistical Year-Book of the League of Nations. 
Prices : Standard Statistics. 

' Slocks : Noi'lh and Soiilli America (refined and blister), United Kingdom, 
llnvi'c, .liipun (nil klmlH). 









■ ■ M i ll-' 



— 62 — 

had been formed and had acquired the control of 90 per cenl of 
world production. Export prices were maintained on a high level, 
especially in 1929. The high prices stimulated an expansion of 
production in mines with relatively high costs. It seems clear 
now that capacity around 1929 was increasing above the level 
which demand could be expected to reach at the then existing 
prices. One factor which influenced the situation was the growing 
use of substitutes for copper. 

The prices of the most important other non-ferrous metals 
were falling in the years preceding the depression. For instance, 
the price of lead fell steadily after 1925, except in 1929, when it 
was influenced by cartel policy. Stocks mounted steadilv, as 
Chart 7- indicates, and output expanded in new mines "with 
very low costs. It is difficult to escape the impression that a 
considerable surplus capacity was developing. 

The production of zinc was also growing fast under the 
influence of technical progress. Stocks were rising, but were not 
considerable, and there is no evidence of over-production before 
1929. Tin production was also expanding, but stocks did not 
rise until the beginning of 1928. Since then, however, Ihey have 
increased considerably. 

When it is borne in mind that the period 1928-29 was on the 
whole a boom period during which stocks might have been 
expected to fall and prices to rise, the situation of non-ferrous 
metals strengthens the view that a certain tendency towards 
over-production was already showing itself before the depression. 
It is clear, however, that in some cases this tendency only began 
quite shortly before the turn in the business cycle. 

The iron and steel industry had increased its capacity during 
and after the war for many reasons. New mines had been dis- 
covered in oversea countries, expansion for war purposes had 
taken place, German industry had been modernised during the 
inflation period, the destroyed French works had been recon- 
structed and up-to-date equipment had been introduced; in 
general, the rationalisation of the industry had been rapid. The 
result was a great increase, in capacity, much in excess of demand. 
The smaller volume of railway construction since the war reduced 
one important source of demand for iron and steel. Further, 
scrap-iron was being used to a greater extent in the production 
of steel. Around 1929 the situation, however, appeared to be 
fairly well balanced. Prices had been falling slight Iv in the 
earlier years, but, owing to technical progress, production was 
not unprofitable and the utilisation of capacity was not below 
what might be considered normal. In view of the fact, however, 
that 1929 was a boom year, it is evident that capacity was much 
in excess of more normal needs. 



63 



Chart 7. 







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1 0. 


m m 1924 1925 1926 "3Z7 026 1979 


J t %H'*fF>Sfrt 



Sources : Stocks : London and Cambridge Economic Service. 

Production : Statistical Year-Book of the League of Nations. 
Price : Standard Statistics. 



» Slocks In the United Stotos nnd visible supply In the United Kingdom. 



— 64 — 

Unlike that of other basic commodities, the monopolistic 
organisation of iron and steel was sufficiently strong to bring 
about a certain stabilisation of the market, in spite of the fact 
that it only embraced producers on the Continent of Europe. 
Not only the Continental Steel Cartel, but also producers in 
other countries pursued a policy of adapting output to demand 
in order to maintain prices. In view of this fact, the situation 
was nol so unstable as a mere study of the relation between 
capacity and probable demand might give reason to believe. 

In the case of nitrates, technical progress had been special] v 
rapid both in Chile and in countries producing synthetic nitrates. 
The increase of production had been remarkable and very large 
stocks had accumulated. Prices were on a lower level than before 
the war, but this did not prevent large profits. Tendencies 
towards over-production were evident. 

One genera] impression arising from a detailed study of these 
and other raw materials stands out. The conditions of supply 
were in almost all cases such that a drop in prices due to a decline 
in demand could not be expected to produce an immediate and 
considerable reduction of supply. This inelasticity of supply 
could not but make for violent price reductions should a business 
depression arrive accompanied by a reduced demand. In this 
respect, the situation of raw material industries included an 
element of instability, which has always manifested itself during 
previous depressions. 

To what extent over-production or tendencies in that direction 
existed in 1928-29 is another question. That this was the case 
with rubber,' timber, copper, nitrates and some others seems 
clear. But it must be remembered that a situation without any 
tendencies towards over-production hardly ever exists and that 
therefore conditions during these years were not necessarily 
different from those which prevailed at other times. 

Two circumstances, however, perhaps suggest the existence of 
unusually strong lendi-ncies towards over-production during 
these years. Monopolistic regulation of prices unaccompanied by 
corresponding regulation of output had led to an augmentation of 
capacity, thus increasing the chances that the latter would out- 
strip demand. This was a new factor which had not been so active 
before the war. The creation of a large number of cartels in itself 
points to a lack of balance between capacity and demand. 
Secondly, 1928-29 was a boom period in the business cycle ; 
consequently, the tendency of raw materials to fall in price and 
of stocks to rise indicate some underlying tendencies towards 
over-production. In other words, while a considerable excess of 
production over consumption — i.e., over-production in a narrow 
sense was to be found only in the case of a few raw materials, 



l^^^^^l^^g 



— 65 — 

the existence of an excessive and unbalanced productive capa- 
city in a large number of them under the general economic 
conditions prevailing in 1928-29 points to the conclusion that 
the situation was highly unstable. This conclusion is however 
uncertain and tentative. 



C. Manufacturing Industries, 

After the above brief account of structural changes and 
incomplete adjustment, the conditions prevailing in the crude- 
food industries and in the production of raw materials, it is 
necessary to examine from the same point of view the situation 
of the manufacturing industries. It is of course only possible 
to give a few brief indications. Many of the lasting or semi- 
permanent changes in demand or in conditions of production 
which appeared after the war called for fundamental readjust- 
ments of production and trade. Many new commodities, like 
rayon, radios, gramophones, motor-cars, etc., acquired a consid- 
erable and rapidly growing importance and it is clear that the 
simultaneous introduction of so many articles tended in several 
indirect ways to create maladjustments between demand and 
productive capacity for these and other goods, thus contributing 
to instability before trade had regained its normal balance. 

Given, however, the prevailing lack of flexibility and imperfect 
adaptation to ends, readjustments, however necessary, can only 
take place slowly. 

The result was that many industries found themselves 
possessed of a productive capacity greatly in excess of what 
was required to meet the effective demand at prices which 
would cover the costs of the majority of producers. That many 
industries had this experience during the post-war period is 
borne out by the figures for idle plant, as well as by the high 
level of unemployment in certain countries. 

The existence of surplus capacity on a large scale is of course 
no new phenomenon ; it existed before the war during certain 
phases of the business cycle. There is reason for believing, 
however, that surplus capacity during boom periods of the 
business cycle was in those days relatively small compared to 
its extent in 1928-29. Further, fixed capital tends to play a 
growing r61e in manufacturing industries, so that the existence 
of unused capacity has become all the more serious. 

The excess capacity in certain industries and countries 
was to a large extent the result of the economic changes caused 
by the war. It has alreudy been mentioned that the special 






_ 66 — 

war needs caused an expansion of certain industries, such as 
iron and steel, in excess of peace-time requirements. 

The war also gave an impetus to the industrialisation of 
certain less industrialised countries. Manufacturing industries 
in such countries as Japan, China, India and the British 
Dominions, expanded at a rapid rate, and this continued after 
the return of peace and more normal conditions of international 
trade. Such a development was particulary serious for industries 
which, like the British textile industry, had their chief export 
markets in these countries and had extended their capacity in 
expectation of a large demand as soon as the war was over. 

Another factor which made for a lack of adjustment between 
productive capacity and demand was the creation of new political 
frontiers in Europe. Many plants were cut off from their old 
markets by Customs barriers along the new frontiers, behind 
which new factories grew up and satisfied local demand. Further, 
the period up to 1925 was characterised by a rapid and almost 
general increase in the height of import duties on manufactured 
goods, which rendered difficult adjustments of productive 
capacity, that, in industries with much fixed plant, could only 
take place slowly. This economic adaptation was hindered and 
made still more difficult by the frequent alterations introduced 
into tariffs. 

< The rapid technical development during this period and the 
deep-going changes in organisation, commonly called " ration- 
alisation ", were factors which increased the need for adaptability. 
There would seem to be reason to believe that this rationalisation 
movement proceeded at a more rapid rate than before the war, 
although the evidence is chiefly circumstantial. New machinery 
was introduced on a larger scale than before, as shown by the 
enormous expansion of the machine-producing industries. The 
growth in output of manufactured goods took place in many 
countries with no, or only a small, rise of the number of workers. 
Unfortunately, very little material is available to illustrate 
directly the increased productivity in manufacturing industries. 
In the United States, the annual increase in output per man 
was 3.5 per cent in the period 1922-1927, while the figures 
for 1922 are not much above those for 1905. In Sweden there 
was little increase from 1915 to 1920, but in the following nine 
years the annual increment was 3.9 per cent. In Germany, the 
number of employed workers seems to have been not quite 5 per 
cent higher in 1929 than in 1925, while the volume of production 
index was 27.5 per cent higher. This indicates an annual increase 
of output per man of about 5 per cent. In the United Kingdom, 
the output per head in manufacturing industries and mining 



— 67 — 

appears to have increased by 10 per cent from 1907 to 1924 
and by 11 per Cent from 1924 to 1929 1 : 

Table X. — Productivity in Manufacturing Industries 
in the United States and Sweden. 

United Kingdom l United States 2 Sweden 3 

1915 4 . ...... 100 100 

1920 91.8 102 

1922 109.4 124 

1924 100 113.2 125 

1926 ....... 126.6 132 

1927 106.8 127.2 133 

1928 106.8 136 

1929 110.7 143 

Sources : liecenl Economic Changes in the United Stales, New York, 1929, p. 454, 
Arbetsloshetens omfatlning, karaklar och orsaker (The Magnitude. 
Character and Causes of Unemployment.) Stockholm, 1931, p. 205. 

It is possible and indeed probable, however, that rationalisa- 
tion increased productive capacity more rapidly than actual 
output. The effects of this rationalisation do not seem to have 
shown themselves on a large scale until after 1925, when the 
re-organisation had been largely carried through in many indus- 
tries and countries. Under the influence of continued rationali- 
sation, the productive capacity in the years before the depression 
had greatly increased ana its utilisation seems in many industries 
to have been appreciably lower than during earlier boom periods. 
Failure to recognise this fact and consequently to scrap old 
machinery and to liquidate less efficient firms contributed to 
the increase of capacity up to the end of the boom, not only in 
new industries where demand was growing, but also in old 
industries with little hope of a greatly increased future demand. 

That certain new trades like the motor and the radio industry 
expanded beyond the limits of possible demand seems indubitable. 
The former industry in the United Slates had a capacity of almost 
eight million cars, but even in boom years, when demand for 
expensive consumption goods was inflated through speculative 



] Report bij the Committee on Finance and Industry, London, 1931, page 309. 
" Annual output per worker employed- 

3 Output per hour. 

4 Swedish llgures for 1913 are not available. The American figure for 1915 
wns 1 per cent higher Ihnn for 1913. 



— 68 — 

gains on the Stock Exchange, it did not produce more than 
5.4 millions. 

It has already been mentioned that railway construction 
after the war has been slight, and that its place has been taken 
by the building of motor roads. Fundamental changes were also 
taking place in sea transportation, where the effects of the great 
increase in shipbuilding during and immediately after the war 
were felt during the whole period. In spite of this large supply 
of coal-burning tonnage, the building of oil-driven ships was 
growing rapidly. Many yards which specialise in such ships 
increased their productive capacity. As long as the volume of 
international trade expanded under the influence of the business 
boom, shipping rates could be maintained on a level which 
yielded some profit. Rates, however, were lower in 1926-1929 
than in 1922-1925 and the facts that on many routes Lhey faikd 
to rise during the boom year 1929 and that even then not all 
tonnage was in use indicate that capacity in sea transportation 
was somewhat ahead of a *' normal " relation to demand. 

The factors mentioned above and other circumstances 
contributed to the creation in many lines of industry of actual 
and growing surplus capacity in the years preceding the present 
depression. The cotton, textile, engineering and shipbuilding 
industries all had a large capacity in excess even of the demand 
in 1928, which was artificially stimulated by the boom. 

The lack of balance in the development of the different 
industries in various countries was of course reflected in un- 
employment. Unfortunately, it is impossible to say to what 
extent unemployment was larger than before the war, but the 
following figures show clearly that it was considerable, varying, 
however, widely from country to country. 



Table XI. — Percentage of Trade Union Members 
Unemployed in September 1926-1928. 





Germany ' 


Belgium f 




A 


B 


A 


B 


1926 . . 

1927 

1928 


15.2 

4.6 
6.6 


12.7 
2.4 
6.9 


1.1 

1.4 
0.6 


2.5 
3.5 
3.3 



1 A. = Wholly unemployed. 
B. = Short -time worker. 



— 69 — 

Table XI. — Percentage of Trade Union Members 
Unemployed in September 1926-1928 (continued). 



Year 


Canada 


United 
Kingdom 


Netherlands 


Sweden 


1926 

1927 

1928 


3.3 
3.1 

2.2- 


13.7 

9.3 

11.4 


7.2 
6.7 
4.8 


9.1 
8.4 
7.8 



There is no evidence that surplus capacity was accompanied 
by low profits in manufacturing industries as a whole. In Great 
Britain, earnings in per cent of total ordinary and preference 
capital in a number of joint-stock companies was 10.5 per cent 
in 1927, 11.1 per cent in 1928 and 10.5 per cent in 1929. These 
figures are not typical of British manufacturing industries as a 
whole and are not strictly comparable owing to changes in the 
capital of the companies included, but they make it probable 
that profits were fairly satisfactory. In the United States, 
corresponding figure; for 1928 is 12 per cent and for 1929 13 
per cent. The difference in the position of British and American 
industries was, however, probably much greater than these 
figures indicate. Though equally comprehensive statistics for 
other countries are lacking, it is clear from the indices of share 
values that conditions in manufacturing industries were generally 
prosperous. 

The fact that considerable surplus capacity in a number of 
industries went hand-in-hand with good profits suggests that 
the price policy pursued may adapt itself to conditions of constant 
surplus capacity and prices may be fixed accordingly without 
any agreements between competing firms. 

The existence of surplus capacity on a large scale naturally 
stimulated the development of monopolistic tendencies. National 
and international cartels were created to enable manufacturers 
to restrict cut-throat competition and to charge profitable 
prices. Such cartels in many cases tended to maintain surplus 
capacity by keeping alive firms which would otherwise have 
succumbed. The limitation of output in certain industries in 
order to keep up prices furthermore tended to increase the 
demand for other commodities and thus to increase productive 
capacity in other industries more than would have been the case 
if the former commodity had been sold at a lower price. This 
effect of a growth in the monopolistic organisation on excess 






— 70 — 

^4^**' ** ° ne »*«* ° f its -«« on the 

M-ho^TL'? 110 tC,lde . ncips involve ** important change in the 
m hole of an economic system founded on free competition 
winch may well have had a great influence on StaEEfSt 
m many different ways. Certain forms o nfkS tv .mv 

Nuctuatrons. This question will be touched upon in Chapter VI 

system ^ h X; er ,k^\ d0 " bt t,la S the faiIu ' e of the SS!S 
system to adapt itself to more or less permanent fundamental 

changes of a structural character must teitd to Se "T« 

balanced and stable than it would otherwise hav Seen For 

nir"' a T tU , r " { ° thc « 0,d standard at a higher parity than 
corresponds to domestic price and wage levels makes t» 
to adjust the latter in a downward direction, if harmony bVlweS 
™ various economic elements is to be achieved, "it seems 
certain that monopolistic price and wage policies and other forms 
of economic friction were partly responsible for the fact that the 
situation in 1928 was characterised bv so much maladjustment 
Another development which is generally believed to have taken 
place in business policy may have had a reverse influence It 
is generally considered that surplus capacity in many industries 
as well as the rise of tariff walls, has increased the practice of 
dumping. If dumping is erratic — that is, if sales abroad are made 
spasmodically — it must of course tend to disturb the normal 
currents ot trade and introduce an element of instability 

In the field of retail marketing of manufactured goods several 
iar-reacning changes took place during the period under review 
among which may be mentioned the growing importance of 
chain stores. From the point of view of the present problem 
another change is. however, of greater importance — namely' 
the growth of instalment selling. This practice has probably 
tended to reduce demand for goods of a durable character 
during the depression, as a part of the consumer's purchasing 
power had already been used to buy goods before the depres- 
sion set in. The consumer is less willing and less able during 
times of economic difficulty to pledge his future income for new 
instalment purchases and may be under an obligation to pay 
off the debts incurred by earlier purchases. Thus the fresh 
demand for such goods is reduced. For other countries than the 
United Slates this factor has, however, been of very small 
importance. J 

The various factors mentioned above have of course played 
a very different role in different countries. Without entering 
upon an analysis of these differences, it is sufficiently clear that 



— 71 — 

structural changes, followed by a slow and insufficient adjustment, 
have made for instability of the economic system. Some reasons 
for this slow adjustment have been given above, but it should 
be added that the existence of a business boom in several countries 
in 1928-29 has exercised a great influence in this respect, as 
it made the situation appear much better balanced than it 
actually was. 



D. Relative Prices and Wages. 

In the previous sections of this chapter, the structural changes 
and lack of balance have been discussed from the standpoint 
of individual industries. They may also be regarded, however, 
from the point of view of relations between large groups of indus- 
tries — ■ e.g., those producing primary products (foodstuffs 
and raw materials) on the one hand and those producing manu- 
factured goods on the other. 

Evidence of a maladjustment or over-production of three 
types has been considered — viz., abnormally large stocks ; 
excess productive capacity and unprofitable commodity prices. 
This tendency of supply and demand to change in such a way as 
to produce any of these three sets of conditions in the near future 
has also been considered. 

However, whether prices of certain commodities are unpro- 
fitable or not, whether they cover costs of production or not, 
depends upon how the latter are computed. If the reward 
to the individuals employed in the production of these commodities, 
in the form of wages or other incomes, is reduced, then even 
what used to be an unprofitable price may be sufficient to cover 
these reduced costs. In a certain sense, it may be permissible to 
speak of over-production of certain commodities even if prices 
cover costs — namely, if the incomes which make up the 
various cost items are "abnormally" low. Over-production of 
crude food products in this sense exists, even though the 
cost accounts show normal interest on the capital invested, if 
this result is reached by paying very low wages to the people 
working on the farms. The main question then becomes, what 
wages are to be regarded as normal ? 

To answer this question is clearly impossible. Some people 
would be inclined to say that, if incomes in one group of industries, 
«. 17., agriculture, have moved in the same way — risen as muche.(/. 
since pre-war times — as incomes in manufacturing industries, 
I hen thc relation is "normal" and production of the two groups 
of commodities in a balanced state. This opinion, however, 



— 72 — 

assumes that the relative incomes and prices in . the pre-war 
years can be regarded as normal. There seems to be little foun- 
dation for such an assumption. 

Fortunately, for the purpose of an analysis of the question 
dealt with in this chapter, it is not necessary to find out anything 
concerning " normal " and " abnormal " income relations, a 
study which, difficult when conditions in one country are consi- 
dered, would be still more difficult in a study of the relation 
between products of industries from different countries. What 
matters from the point of view of balance and stability of industry 
is not whether relative incomes, for instance those of farmers and 
town workers, have changed since some earlier date, but whether 
an adaptation towards the new conditions has taken place or not. 
If farm incomes have recently been much reduced and farmers 
arc therefore unable to buy as much manufactured goods as they 
used to, then industries producing these goods will have a surplus 
capacity and some of their workers will be unemployed . Similarly, 
if coffee growers in Brazil have had their incomes reduced, Euro- 
pean and American export industries, working partly for the 
Brazilian market, will suffer. On the other hand, a reduction 
of the purchasing power of certain classes or a failure of such 
purchasing power to rise as much as that of others is compatible 
with general balance and full utilisation of the productive factors, 
if industry has had time to adjust its output to these new 
conditions. In other words, the point to which importance should 
be attached is whether production has adapted itself to the new 
state of demand which is the outcome of a new distribution of the 
national income. 

The question to be answered is therefore whether, in the years 
preceding the depression, changes in the relative incomes of 
different groups of producers had taken place or were taking 
place. If the answer is in the affirmative, the task becomes one 
of analysing whether this brought any changes in demand or other 
conditions to which industry had not adapted itself in the years 
immediately preceding the depression ; in other words, whether 
it made for instability and reduced power of resistance towards 
the attack of a business cycle depression. 

As reliable statistics concerning the distribution of income 
are scarce, it is necessary to employ for a study of this problem 
such material as is available concerning the movement of prices 
of different groups of commodities. First attention will be given 
to prices of primary products on the one hand and of manufactured 
goods on the other. 

While the price of material for primary products and semi- 
manufactured goods is fairly satisfactory, there is unfortunately 
no adequate body of comparable data relating to finished products. 



— 73 — 

Methods of production have undergone frequent changes and 
demand has Substantially altered since before he war. Ccrta m 
aoS Is came into everyday use after the war which were practically 
unobtaSle in 1913 ; wireless receiving sets may be men honed 
as an outstanding example. The rapid growth of the autocue 
and aluminium industries further serves to illustrate the act 
that indices based on 1913 weights cannot give » complrtdj 
accurate reflection of price movements of mamr fad hired 
commodities in the post-war period. To a considerable extent, 
nShi the. "new "industries catering for the secondary needs 
of life that the greatest technical progress was made in the last 
decide and the products of these industries haw probably 
Sn more in pricHhan such standard pre-war finished goods 
as are included in the ordinary indices of wholesale prices. 
Accordinglv no great reliance should be placed on the absolute 
St of the indices given below, but attention should rather be 
coStrated on the general character of the movement which 

the L d e S n Cl wh;n allowance is made for these g^JSSS 
evidence drawn from several sources as independent of each other 
is possible clearly suggests that primary products Big 
ruled considerably lower in price than manufactured goo ds_ in 
most parts of the"world throughout the entire £*"&"*; 
\ comparison inav first be attempted "I &« ul.'trw pTW 
movements of raw materials and manufactured products consi- 
dererUs a whole. The. following table shows that indices of prices 
for finished products were substantially higher than corresponding 
indices for raw materials. 



Table XII — Indices of Prices of Finished Products expressed 
as Percentages of Indices of Raw Material Prices. * 



Canada . 
Denmark 
Germany 
Norway . 



192 



104 

130 i 
llli 
100 2 



192S 



96 
129 
119 
105 



1922 



Sweden 
U.S.A. 3 
U.S.A. 4 



123 
107 
121 



1928 



103 
106 5 
110 



* The original indices are based on the year 1913 In all cases except the first 
«wic» for the U S A. in which the base year is 191b. 

11925 The raw material indices include partly manufactured goods. 

•l 1923 

" Index ol Bureau of Labor statistics. Identical commodities. 

* Indices of National Bureau of Economic Research. 
» 192. r >. 



— 74 — 

Had statistics for a range of years been given in the above 

SJMT" 1 ^ h3Ve ^ apparent that th * P" ce discrepancy 
™, g - at ^ St m each , C0UDtr y durin g the various periods of 

was Twetl n^S'T; S? "J 6 ^? fr0m dep « «"« 
was a well-marked tendency for the indices to approach each 

other in ail countries. Even in 1928, however, manufactured 

goods appear to have ruled relatively higher in p ice San raw 

matenals (as compared with 1913) in manv partfTtie^ri? 

I he only apparent exception among the countries included 

Dri l fiSHi*" 6 IS C r a 1f- A specia > anaIvsis of the CanSn 
price statistics suggests, however, that, if groups including 

precisely the same commodities in different stages of manufacture 

were available, the indices for that country would show the same 

relationship as that observed in other ' countries 

A more detailed enquiry into relative price movements in 

recent years undertaken by the League of NatCs vtth the 

assistance of certain national statistical offices * offers strong 

corroboratmn of this conclusion. The figures below show To? 

rilffJ 6 "," CeS , ° f Certahl grou P s of semi-manufactured 
l m ^ ^ fac tured goods as percentages of the indices of the 
raw matenals from which they are produced. 

1. Great Britain . . . Finished foodstuffs 105 

2. Germany Semi-manufactured goods : 

(a) of mineral origin 119 

(b) of vegetable and animal 
ori gin 108 

3 - France (a) Finished foodstuffs .... 103 

(b) Semi-manufactured goods of 
vegetable and animal origin 
for industrial use 106 

4 - Ital y (a) Finished foodstuffs .... 92 

(b) Finished products of mineral 
origin 128 

(c) Finished products of vege- 
table and animal origin for 
industrial use 115 

mmwimmm 



— 75 — 

In every case for which more or less comparable series are 
available (except Italian foodstuffs) the more finished goods 
had risen more in price since 1913 than the raw materials from 
which they are made. In general, the margin was least in the 
case of foodstuffs, which undergo less processing before final 
consumption, than industrial goods. 

An analysis of the prices of individual commodities in various 
stages of manufacture, from raw materials to finished form, 
also shows that, during the post-war period, the higher a given 
commodity stood in stage of manufacture the more had it risen 
in price since 1913. Such an analysis has been made for several 
years in the League of Nations Memoranda on Production and 
Trade ; in the following table are shown some representative 
indices for some of the more important countries for which 
serviceable data are available in official sources. 



Table XIII. — Prices of Certain Manufactured 

Commodities expressed as Percentages of the Prices of the Raw 

Material employed. 

1928. 



United States 


Canada 


Wheat 

Bread ........ 


100 
HI 
126 


Flour ........ 

Bakery produce . . . 


100 
103 
124 


CiilT skins 

» shoes ...... 


100 
108 


Milk 

» products .... 


100 
107 


Copper 


100 
108 


Silk, raw 

» manufactured . . 


100 
126 


Wood pulp 

Newsprint paper . . . 


100 
139 


Lead ... 


100 
136 



— 76 — 

Table XIII. — Prices of Certain Manufactured 

Commodities expressed as Percentages of the Prices of the Raw 

Material employed (continued). 

1928. 



Germany 



Rye . . , 
» flour , 

Pigs . . , . 
Pork . . . 

Cotton . . 
Cotton yarn 



100 
103 



100 
109 



Sweden 



Wood 

Wooden articles 



100 
125 



100 
106 



Hides and skins 

Leather 

Shoes .... 



100 
113 
130 



Pulp . . 
Cardboard 
Paper . . 



I 



100 
120 
129 



These indices happen to exclude some of the industries in 
which the greatest technical advances were made in the S-w 
period but they are representative of a wide range of buinlss 
ttsel^ CS S£ *"■ PreCed ^ «» ie similar 5 

One aspect of post-war changes in the relative prices of 
pnmary and manufactured products on which attention has 
been particularly concentrated in recent years is the divergence 
m the price movements of agricultural and industrial goods 
Relatively ow prices of many crude foodstuffs obtained through- 
out most of the period 1922 to 1928. After the crisis of Sll 
index numbers of agricultural prices were much lower than those 
of industrial goods. In 1924 and 1925, however, a considerable 
= vement took place to the position of agriculture n mo 
countries ; cereal prices rose markedly, as did those of manv 

rmnL^^^r^r 15 -. 111 1926 ' ' 10WWer > Prices orsevS 
important foodstuffs like wheal again began to fall. In 19^5 

the discrepancy was less than in 1922, but in many count S 

it increased again after the former year ramnnes 

It is not so much the absolute level of the prices of this particular 

SthSr?» r ten fl SWhich ? Wf interest in the P*** cLSon 
as their level m relation to the prices of other groups of products 

and, in particular, industrial products. The material for such 



— 77 — 

a comparison is not entirely satisfactory ; many of the existing 
indices of agricultural prices are based on pre-war weights and 
do not take into account the shifts that have taken place in the 
character of agricultural production in response to changes 
in the relative prices of different groups of farm products. These 
shifts, particularly over a long period of years, may be of con- 
siderable importance. 

The evidence presented by different groups of indices drawn 
up on various principles is, however, sufficiently uniform to 
afford a convincing corroboration of the figures already shown. 
For instance, the index-numbers of agricultural products were 
considerably lower than the general wholesale price index in 
most countries. 

Where group indices for agricultural and industrial products 
are available they point equally emphatically in the same direc- 
tion : in Germany, for instance, the purchasing power of the 
former in terms of the latter was 89 (base 1913 = 100) in the 
crop year 1924-25 and 93 in 1928-29 ; on account of the short 
cereal harvest of 1926-27, it rose markedly in that year. In 
Poland, official indices for agricultural and industrial products 
based on 1927 showed a relationship between the two groups of 
71 (industrial products = 100) in 1922, 90 in 1925 and 93 in 1928. 

In certain countries special indices of the prices of articles 
purchased by farmers have been compiled. Throughout the 
period 1922-1928 they were considerably higher than the indices 
of the agricultural products, from which the farmer derived 
his income. 

Table XIV. 





Agricultural 
Products 


Art ides 

purch ased 

by Farmers 


Relationship 

(Articles 

purchased 

by farmers 

= 100) 


Sweden x 1922-23 


142 


169 


84 


1925-26 


147 


152 


97 


1927-28 


143 


152 


94 


U. S. A. 2 1922 


124 


152 


81 


1925 


147 


159 


92 


1928 


139 


156 


90 



Source : Index Numbers of Prices of Agricultural Produce, International 
Institute of Agriculture. 

1 Duho 11)09-11)13. The figures are averages for two years. 
"Uuho iftlO-lttH. 



— 78 — 

Hai,.l n r° UntricS .u Wh o- se ^i^'Hure consists chiefly of meat or 
dairy farming, the discrepancy between agricultural oriwTand 
prices in general was much less than in counS whX cereals 
play the greatest role. Animal foods ruled relative^ iSf in 
pr.ce throughout most of this period. In England, forexample 
lie index-number of agricultural prices stood m WgTSor 
w i h r , U Si ' h /* gMl index -" um ber of wholesale prices published 
% SS 1 m , ev 7y>^. between 1922 and 1928, except in 
1921 This *as due to the high prices prevailing for most fruits 
vegetables, meats and animal products, which accoufflHKmS 
three-quarters of the English agricultural price in! x Tl pric . 
of cereals and farm crops were much lower than those of other 

Table XV. — Price Indices of Agricultural and other Products. 
(Base 1913, unless otherwise indicated.) 




Australia. 



Belgium 1 



France . 



Spain 



United 



Cereals and vegetables 

Meat 

Dairy Produce . . , . 
Metals and coal . 



Foods . . . ,.. , 

Fuels 

Metallurgical Products . 
Textiles . . , 



Foodstuffs 

Minerals and Metals 
Textiles ... 



Foodstuffs 
Metals . . 
Textiles . 



Cereals . 



Kingdom . | Minerals 
(Economist) Textiles 



1 April 1914 = 100. 



148 
143 
156 
186 

338 
424 
338 
432 



174 
152 
149 

151 
150 
181 



157 
161 
166 
183 

879 

825 

790 

1,124 

845 
522 
840 

176 
148 
151 

153 
115 
165 



— 79 — 

It should not be concluded from the above discussion that 
the price situation in the period 1922-1928 was such as to place 
the producers of foodstuffs in an inferior economic position to 
the producers of other raw materials. In the latter part of this 
period, indeed, foodstuffs in general ruled relatively higher in 
price than mineral and metallurgical products. In Table XV 
above, certain group indices which, though far from being ideal, 
afford some evidence of value on this point, are shown. The 
groups are never identical in composition and the figures for 
one country must not be compared with those for another. 

The above table shows that the relationship between the 
prices of foodstuffs and other classes of raw materials changed 
markedly in favour of the former between 1922 and 1928. Since 
1924, foodstuffs have ruled relatively higher in price than minerals 
and metals in almost every country considered. The only excep- 
tion to this statement in 1928 was Australia. The position in this 
country must be ascribed in large measure to the effects of the 
tariff, which keeps up the prices of most industrial products, 
while the price of those crude-food products of which Australia 
has a net export surplus are naturally determined by world 
market conditions. 

It is not necessary to draw attention to the relatively high 
level of textiles in all countries throughout the period considered. 
Flax and wool ruled particularly high ; in 1926-1928, both these 
commodities were more than double their pre-war price. Silk 
was also relatively high until 1926 ; in that year the competition 
of artificial silk began to be felt very severely and silk prices 
fell steadily. Cotton prices reached their maximum in 1923 or 
1924; subsequently they dropped steadily and recovered some- 
what during the general upward movement of 1928. 

The tendencies indicated in the above table may be further 
illustrated by the special indices of various groups of raw mate- 
rials prepared by certain national statistical offices in connection 
with the League of Nations enquiry into relative price levels to 
which reference has been made above. Some of these indices for 
I he year 1928 are shown below : 



Table XVI. — Price Indices of Various Groups 
of Raw Materials, 1928 (1913 = 100.) 



Maw materials of vegetable and ani- 
mal origin : 

(a) for foodstuffs 

(b) for industrial use 

Unw materials of mineral origin. . . 



Germany Italy France 



129 529 
139 522 
116 416 



565 

777 
540 



— 80 — 

A series of index-numbers relating to " foods " and " non- 
foods * compiled by the American National Bureau of Economic 
Research is of particular interest for the light it throws on the 
price movements of these groups in different stages of manu- 
facture. 



Table XVII. — 



Price Indices of Various Groups of Commodities 
in the United States. 

(1913 = 100). 





(i) 


<2) 
Producers' 


(3) 




All Commodities 


Goods destined 


Consumers' Goods 






For human 


processed 






consumption 






Foods Non-Foods 


Foods 


NonFoods 


Foods 


Non-Foods 


1922 . . . 


136 


157 


122 131 


144 


180 


1924 . . . 


144 


165 


138 


138 


147 


193 


1926 . . . 


149 


160 


138 


135 


153 


180 


1928 . . . 

1 


151 


154 


149 132 


152 


176 



Foodstuffs as a group fell more than non-foods during the 
depression of 1920-2! ; they gradually rose in price while the 
latter fell quite steadily since 1923 : by 1928 the two groups 
stood at practically their pre-war position. The foods index in 
the first series above, however, contains manufactured as well 
as raw- products ; similarly with the non-foods index. Columns 
(2) and (3) give indices for these two groups which are more 
clearly divided according to stage of manufacture. Producers' 
goods destined for human consumption can be taken as roughly 
equivalent to raw materials and partly manufactured goods 
(such as wheat and flour, cotton and cotton yarn), while the 
indices for consumers' goods relate entirely to manufactured 
products ready for consumption (such as "bread and cotton 
piece goods). The foodstuffs in the former group stood somewhat 
lower m price than non-foods in 1922, but they had acquired 
their pre-war equilibrium with the latter bv 1924 and rose 
considerably between that year and 1928, while non-foods fell 
slightly. The relationship between the indices for consumers' 
goods is of quite a different character : non-foods stood very 
much higher in price than foods throughout the entire period 
The margin between foodstuffs in the producers' stage and 



mtmrn 






81 — 



ready for consumption diminished. It was very much less than 
the margin between other commodities in these stages. 

These indices do not confirm the view sometimes held that 
the greater part of the discrepancy between the prices of goods 
in different stages of manufacture is to be explained by the large 
number of wholesalers and other dealers ; this number is, on the 
whole, probably proportionately larger for foodstuffs than for other 
articles. The explanation is rather that foods characteristically 
undergo fewer and simpler processes of manufacture on their 
way from the primary producer to the ultimate consumer. The 
above series clearly suggest that over the period 1922-1928 
price relationships in the United States tended to move to the 
advantage of the producer of raw foodstuffs and that (as measured 
in relative prices) his position in the latter part of this period 
was more favourable than that of the producer of other raw 
materials. 

The effects of all these changes in relative price levels on 
the extent and character of international trade in the post-war 
period were considerable. Attention may first be directed to 
changes in the barter terms of trade between industrialised and 
raw-material and food-producing States. An examination of the 
import and export price indices of States whose imports or exports 
consist chiefly of one of these groups of commodities shows 
that throughout this entire period the States exporting manu- 
factured goods were able to buy their imports of foodstuffs and 
raw materials relatively cheaply, while the States exporting crude 
foodstuffs and raw materials had to give up a much greater 
quantity of these products than in 1913 in return for the same 
amount of manufactured goods. The discrepancy between the 
import and export price indices was greatest in 1920. With the 
recovery from the crisis of that year, the indices tended to move 
closer together until 1925 ; between 1925 and 1928 the movement 
was less regular. 

In the following table are set out the gold import and export 
price indices of certain representative States. The first three States 
are primarily exporters of manufactured goods and importers 
of raw materials ; in 1928, for instance, manufactured goods 
accounted for about 75 per cent of their exports. The last three 
Stales export chiefly raw materials and import manufactured 
goods ; in the year mentioned raw materials and foodstuffs 
:uTountcd for a similar proportion of their exports. The fact 
that the highly industrialised Slates enjoyed favourable barter 
terms compared with 1913 throughout the whole period emerges 
Clearly from the following statement which shows how many 
units of its exports each of these countries had to give up for 
100 units of its imports. 



— 82 — 

Table XVIII. — Terms of Exchange in International Trade. 
(Base 1913 = 100.) 

1924 1926 1928 

Importers of Raw Materials and Foodstuffs. 

Germany 105 95 95 

Switzerland 92 94 97 

United Kingdom 82 82 84 

Exporters of Raw Materials and Foodstuffs. 

Argentine 136 137 — 

India 117 112 105 

Dutch East Indies 115 120 122 

The peculiar position of Germany in 1924 is obviously due to 
the depreciation in the value of the currency which at that time 
made exports of all kinds of goods cheap relatively to imports ; 
after the re-valuation of the mark, this phenomenon disappeared 
and the German export and import indices show the same 
relationship as those of other industrialised States. 

Many causes have contributed towards this discrepancy in 
the movement of prices of primary products and manufactured 
products. We must consider, in the first place, the various 
factors affecting the relation between crude foodstuffs and 
manufactured goods. The relative rise in the prices of the latter 
need not depend upon a greater increase in nominal wages or 
incomes in manufacturing industries, but may be due to increases 
of other cost items. There can, for instance, be no doubt that 
taxation has weighed more heavily on the later stages of produc- 
tion. After the war, most Si ates were left, with a greatly increased 
burden of expenditure on the service of puhlic debt ; further, 
taxation was increased in order to provide for new expenditure 
on social purposes and in some cases on armaments. The depressed 
condition of agriculture resulted in the main burden of the new 
taxation being placed on manufacturing industries. A large part 
of the social expenditure had to be borne directly by workers 
and manufacturers through the payment of social insurance 
premia, and in other ways. An obvious example of a common 
post-war tax which affects manufacturing industries more than 
primary production is the turnover tax. When imposed on 
each exchange of goods Which takes place on the way from the 
primary to the final procedure* this tax naturally increases the 
price of the finished product more than that of the raw material. 
Corporation taxes also affect manufacturing industries to a 
greater extent than agriculture, in which individual or family 
enterprises dominate. 



— 83 — 

There can be no doubt, however, that one important reason 
whv relative commodity prices have moved in the way indicated 
above is that wages and incomes in manufacturing industries 
havlrisen more than in agriculture. The following wage data in 
Table XIX illustrate this movement. 

A comparison between wages in industrial and apical turd 
pursuits is rendered difficult on account of tlwfact that a large 
mrt of agricultural wages normally takes the form of parents 
fn kind - i e board and lodging. For several countries, indices 
Saking allowance for this iAL available ; ^ irtg*"* 
clearly that in certain countries such as the l_niie.! States ami 
Sweden where there has been no special legislation enforcing 
mTnimum wages in agriculture, the rise in wages of agricultural 
workers since before the war has been considerably less than in 
the case of industrial workers. 

Table XIX. — Indices of Nominal Wages of Industrial 
and Agricultural Workers. * 

(Pre-War Base.) 

V 1924 

Australia. . . . Industry and Agriculture 171 
Agriculture 1/4 

Canada .... Industry ■ • J84 

Agriculture iy/ 

New Zealand . Industry and Agriculture 123 
Agriculture t*^ 

Sweden .... Industry 211 

Agriculture iyu 

Great Britain . Industry and Agriculture 170 
Agriculture i0t> 

(j. s. A Manufacturing Industry. 211 

Agriculture 163 

Source : International Labour Office. 



1928 

183 
194 

188 
196 

164 
165 

224 
185 

170-175 
176 

224 
163 






— 84 — 

In all countries, except Australia and Canada, industrial 
S$* ™f ^^erably more than agricultural wages between 
wwTe L1 J: f ? ,ld I™' £ U r iU " il ^'K\ 1 gdom.s K ci^niinimum" 
#Hf J.,2 a \\l° r ag V CU tUraI wkcrs was introduced after 
that year, with the result that the indices for the two aroim' ,,f 
wages stood at about the same level in 1928. In most countries 

S?a ifuiJVr 0131 {SS? ati !i n ,? ' his kind ' industrials 
J^J, a > b ^ tween 1924 g?d 1928, while agricultural wage, 
remained steady or fell. Thus, the wage discrepant wis 
somewhat increased. ^ uiawejwucy was 

The cost of living has of course risen in all countries since 

wages m 1928 stood well above the pre-war level. The rise snot 
comparable from country to countrv on account of the differ n 
m^odsofomstrucUnglhe indices/ For manufactur g worke 

P« t0 hav ? amounted to some 35 per cent i„ the S 
cen n SSS.*"* T Swfde, V * ^ r «"** ^witzerlami, 18 p r 

mmc if * S ° ? ■ ' In Vk ' w ° f the fact ,hat the » a tional 
» one of al these countries was rising, an increase in wages did 

^r CS T ( n!ym(Iira ! L : any Chan ^ [ " thl ' ^i^ribulion o g f that 
SSSed ifthTh m ^ f e u WageS ,° f a S™»^ workers, if 
Ever tarn I > « nl °r *! l ] SUal cost -<> f -li™g index, has, 
nowever, been less than for industrial workers hut tn «n™ 
degree the difference may be compensated by the fact Lt the 
cost of hvmg has not risen so much for farm as for town workers 

ind^JfeS rvU l ° l ) ly t0 . Wages of agricultural workers 
and not to [incomes of fadependent farmers, who constitute a 
cons.derable proportion of the people working on the land fW 
accounts another data indicate that the net monfv intomes 
of independent farmers haw in many countries riserWess than 
agricultural wages Thus, the discrepancy between X movemen? 

sfe $& tsar* industria] Lrk - is ^ = 

j^^r^a spftsut aars s 

terms of changed conditions of supply and demand Th7 rap d 

i mCa |l! r '- greSS m *: oo tl ,rodud »^ nd ^tries has been discussed 

Hen,; I H m r re:iSe I!I dema " d WaS f ,robabI Y "«* proporlio m te 
Hence a declining percentage of the world's ponu alion was 
needed ,n food-production. A change in human aftZty did as a 
matter of fact, take place. Evidently, however the nonulalion 
on he land did not fall off rapidly enough to res tncftfflv of 
rood products sufficiently to enable wages and incomes maori 
culture to me as much as in other industries. In otKSs ?he 
mobddy from agriculture to other industries was msuMcie 



— 85 — 

In certain countries such as Canada and Australia, however, 
where the technical progress in certain food-producing industries 
was particularly rapid, there was of course no need for a reduction 
of the population on the land. On the contrary, in certain areas, 
it was necessary that a rapid increase should take place. Agri- 
cultural wages rose in these countries as much as wages in manu- 
facturing industries. 

It is not necessary to consider here all the influences which 
checked the movement of labour from the land to other occupa- 
tions. One factor was the existence of considerable unemployment 
in manufacturing industries in most countries, which made it 
very difficult for farm labourers to obtain work in other industries. 
In some countries, trade unions pursued a policy designed to keep 
wages high in important industries. 

In the world as a whole, a relatively small reduction of the 
food-producing population would have been sufficient to cause a 
relative rise in the prices of crude foodstuffs, owing to the fact 
that demand for food products is relatively inelastic. In some 
countries, however, higher prices of foodstuffs would have led 
to an expansion in food industries still greater than that which 
actually took place. Hence, a correspondingly great reduction of 
the crude-food industries in other countries would have been called 
for. 

Somewhat similar causes contributed to the fact that raw- 
material prices fell in terms of manufactured goods. Technical 
progress was, as explained in the previous section, very rapid in 
several raw-material-producing industries. One factor which, as 
has already been mentioned, tended to keep down demand for 
raw materials was that the rising standard of living frequently 
brought about a demand for finer qualities rather than for a 
greater quantity of goods ; or a demand for services rather than 
for commodities. The possibility of carrying out a rapid contrac- 
tion of the people employed in raw-material industries was in 
many countries small — - for instance, in the countries in an 
early stage of economic development where manufacturing 
industries were weak. Higher duties on manufactured goods 
stimulated the expansion of these industries in such countries 
and thus tended to make a transfer of labour in this direction 
easier. This, however, is only one side of the influence of tariffs. 
The policy of increasing import, duties on manufactured goods 
pursued by certain raw-ma terial-producing countries also affected 
(lie economic situation in an entirely different way. It caused 
surplus capacity in manufacturing industries in other countries, 
raised average costs of production and made manufactured 
commodities relatively expensive. Consequently, the total 
volume of production of such commodities and the demand 



— 86 — 

for raw materials was reduced. It is possible therefore that a more 
liberal tariff policy, although it would have made an expansion 
of manufacturing industries in the raw-matcrial-producing 
countries more difficult, would have led to relatively higher prices 
of primary products. This seems all the more probable as in many 
countries the existence of high import tariffs for manufactured 
goods math: it possible to lift wage and income levels in the 
protected industries in a way which was impossible in export 
industries and primary industries alike. It has been characteristic 
of the economic situation in many countries after the war that 
wages in the so-called sheltered or home-market industries have 
risen considerably more than wages in non-sheltered or" compe- 
tition " industries. IT the wage movement in agriculture is com- 
pared with the movement in the latter group of industries, the 
discrepancy is considerably smaller than the figures above indi- 
cate. In other words, the exceptional increase of wages in the 
building trade and in some industries working for the home 
market has contributed in no small degree to the shift in price 
and wage relations to the disadvantage of primary industries. 
Unfortunately, very scanty material is available to throw light 
on this question. In Denmark earnings per hour in the second 
quarter of 1927 were 20 per cent higher in 11 typical home market 
industries than in 11 typical " competition " trades. A special 
analysis of conditions in Sweden has given the following result : 

Table XX. — Earnings per Hour for Male Workers in 1928. * 

Competitive, industries 0.29 

Sheltered home-market industries 2 . . . 34 
All industries 0.30 

Another factor which helped to maintain higher prices of 
manufactured commodities and higher incomes of those employed 
in their production was that a restriction of supply in cases of 
excess capacity could be achieved more easily than in raw-mate- 
rial-producing industries, at any rate in so far as the latter 
worked for the world market and the former for local or national 
markets. Hence, an agreement between a small number of pro- 
ducers or a business policy pursued by individual producers 
without agreement directed to prevent unprofitable prices through 
restriction of output was relatively easy to maintain. In raw- 



1 Arbetsloshelens omfattning, karaktar och orsaker (The Magnitude, Character 
and Causes of Unemployment). Arbetslnshetsutredningens betankande. I. 1. 
Stockholm, 1931. 

2 Does not include the building trade. 






— 87 — 

material industries, on the other hand, the numerous attempts 
to restrict supply broke down as already explained. 

The facts described above seem to point clearly to the exis- 
tence of a lack of balance and consequent instability in the years 
preceding the depression of such a character as to constitute at 
once a contributory cause and an impediment to rapid recovery. 
It has already been mentioned that many manufacturing industries 
had a considerable surplus capacity, especially among those 
designed for a large export to overseas countries, many of which 
were dependent on the production of primary commodities. 
Greater purchasing power in these countries, as well as in the 
hands of farmers elsewhere, would have made larger sales of manu- 
factured goods to them possible and would thus have made for 
harmony between capacity of production and demand for such 
commodities. 



E. Movement of the General Price Level as a Special 
Cause of Maladjustment. 

Post-war Inflation and Deflation. 

In the years preceding the depression the movement of 
wholesale prices differed very markedly from country to country, 
as Chart 8 shows. . , 

In some countries where currency inflation had taken or was 
taking place prices were rising, in others they were falling as a 
result of a more or less deliberate policy of deflation connected 
with a return to some form of gold standard. If all prices and 
wages had moved in the same direction and if old contracts 
had been adjusted accordingly, such changes in the purchasing 
[lower of monev would have had little, or no influence on economic 
relations. In fact, however, certain prices are much more flexible 
Hum others and the terms of old contracts are usually not altered. 
As a result, considerable movements of the general price levels 
have a pronounced influence on relative values, on the distribution 
of income and on economic life in genera). For instance, wages 
usually move less rapidly than wholesale prices ; costs_ of pro- 
duction therefore tend to be relatively high in countries with 
lulling prices and relatively low in countries wiLh rising prices. 
No doubt, the gold value of wages in certain countries -— as, 
for instance, France and Belgium — in 1928 were relatively low 
mid in other countries — such as Great Britain, Italy or Norway 

where nominal wages had not been reduced to the same extent 
hh prices, relatively high. This applied not only to home market 



Chart 8. 

Wholesale^ Price Level in Certain Countries 1924-1928. 
(Base 1913 = 100.) 



m 



/ v. 



W^Aff - I W 



/ 
/ 



HO 



£<- 



1924 



— 



IMS 



1976 



i»? 



1KB ) 



M 



V 



\ 



\ 






I V :.fifmtSS 




QB 



«h 



w 



W& 



MB W28 



Source : League of Nations Jl/o/i/Mj, Bu// e /, n / Statistics. 



— 89 — 

industries, which were little affected by international competition, 
but also to export industries. 

Retail prices also showed a tendency to lag behind wholesale 
prices — that is to say, were relatively low in countries with 
rising prices and high in those with falling prices. This tended 
to make real wages in the former countries higher and in the 
latter countries lower than they would otherwise have been. 
The pressure to raise the nominal wage level in countries with 
rising prices was thus weakened and the reduction of wages in 
countries with falling prices was rendered more difficult. 

Certain wholesale prices are of course more flexible than 
others. In general, prices of commodities which are little affected 
by international competition (home market prices) adjust them- 
selves much more slowly than those of import or export com- 
modities or goods which compete directly with them. Yet there 
is little doubt that, in countries with a rising price level, the 
costs and prices of export goods tended to be relatively low in 
terms of gold, while in countries in which prices are falling they 
tended to be relatively high. 

For many non-standardised commodities, international com- 
petition was not sufficiently complete to prevent a country 
from selling large quantities of products at somewhat higher 
prices than its competitors, but the volume of exports from such 
a country naturally tended to decline. 

Thus price maladjustments tended to affect international, 
trade and the whole economic situation in a number of different 
ways. Unemployment was aggravated in countries in which 
the price level was falling, while the reverse was true in countries 
with a rising price level. The barter terms of trade (the terms 
at which the various countries exchanged their goods) moved 
to the advantage of countries with high gold prices, but they 
bought this advantage at the cost of a reduced volume of exports. 



Table XXI. — Import and Export Price Indices of Deflationist 

and Inflationist Countries, 1924. 

(Gold indices based on trade values; 1913 — 100.) 



Deflationist Countries 1924 

Czechoslovakia. . Import 145 

Export 146 
Sweden Import 117 

Export 151 
Switzerland . . . Import 144 

Export 157 
United Kingdom. Import 141 

Export 162 



Inflationist Countries 1924 

France Import 143 

Export 126 

Germany .... Import 134 

Export 128 

Hungary .... Import 146 

Export 119 

Italy Import 118 

Export 109 






— 90 — 

Such inequalities in price movements find the fact that old 

<" ;"' Ls XV,IV ""' adjusted, naturally affected the profits realised 

hv different industries. Profits have tended to be tower in export 
u u lust nes than in home market industries in such high uold- 
price countries as Great Britain, and the reverse has been' [rue 
of countries with a depreciated currency. The export industries 
of such countries have, on the whole, had difficulties in realism.. 
normal profits in view of the relatively high eosts For I his 
maladjustment <>i eosts and prices the high taxation in post-war 
years has often been held responsible. Costs other than taxes 
(in so tar as they constitute costs) might, however, have been 
adjusted downwards either as a result of technical improvement 
or price or wage reductions. The inflexibility and the height of 
taxation has been only one aspect of the incomplete adapt- 
ation of costs and prices to the new conditions resulting from 
a return to the gold standard at the old parity. 

For a considerable period after the earlier depression or 19">1 
a process of readjustment of price relations took place in countries 
with more or less stable monetary conditions. In other countries 
Iiowever, the currency inflation tended rather to increase mal- 
adjustments, especially up to the year 1926. There can be no 
doubt that, in 1928, international price relations were very far 
[mm what .might be called normal or natural. This is illustrated 
by the following table. 



Table XXII. — Wholesale Price Levels in 1928 (Gold Indices). 
(Base 1913 or 1914 = 100.) 



Australia 164 

British India 163 

Norway 160 

Japan 159 

Peru 157 

China 155 

Denmark 153 

Canada , 151 

Dutch East Indies . . 149 

Netherlands 149 

Sweden 148 

New Zealand 147 

Finland 145 

Switzerland 145 

Spain 144 

Czechoslovakia .... 143' 



United Kingdom . . . 140 

Germany 140 

U. S. A 140 

Hungary 135 

Italy (Milan) 134 

Bulgaria 133 

Austria 130 

Latvia 129 

France 126 

Belgium 122 

Estonia 121 

Egypt 120 

South Africa 120 

Poland 120 

Chile 119 



— 91 — 

The above table shows that the movement of wholesale 
prices expressed in gold since 1913 has varied widely from 
country to country. When interpreting such figures, it must, 
however, be kept in mind that identical indices for all countries 
would not indicate that the price relationships were normal. 
In the first place, price indices are constructed on very different 
principles in different countries and are, for this reason, not 
directly comparable. In the second place, substantial differences 
in economic development may well bring about an appreciable 
and permanent change in the relation between national price 
levels. The discrepancies revealed in this table are, however, 
so great that it is impossible not to accept as a partial explanation 
a lack of adjustment after the violent price fluctuations of 
previous years. 

This conclusion is confirmed by the fact that the trend of 
cost-of-living indices and wages in countries which gradually 
raised the value of their currency to its old gold parity was 
different from that in countries which stabilised at a relatively 
low rate of exchange. Thus the cost of living and wages rose 
rapidly in France — the cost-of-living index from 366 in July 
1924 to 525 in July 1927 and 556 in July 1929 — while they 
declined or remained stable in countries which had previously 
gone through a period of deflation. In brief, a process of adapta- 
tion was going on, but it was by 1928 as yet far from complete. 



The Movement of World Prices. 

These international differences and maladjustments were 
a legacy from the days of paper currencies and inflation. The 
process of adaptation which has just been discussed implied an 
adjustment either upwards or downwards of the various individual 
prices to levels corresponding with the gold value at which the 
currency had been fixed. 

At the same time, it may well be that the world gold-price 
system as such, comprising all the national price systems, had 
iiol become stable by 1928. Many economists are of the opinion 
that this was the case and that gold prices had been moving 
downwards during the five or six years preceding the depression 
and that this downward trend produced fresh maladjustments, 
hampered industry and trade and rendered the whole economic 
position in 1928 much less balanced than it would have been, if 
the general tendency of gold prices had been stable or in an 
upward direction. 

As may be seen from Table XXIII below, wholesale prices 
tended to rise in some countries and to fall in others. Certain 



— 92 — 



— 93 — 



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paper-money countries had a very low wholesale price level in 
terms of gold in 1922-23 — e.g., in 1922 the German index in 
terms of gold was about 20 per cent below the 1913 level. In 
a sense, the currencies of these countries were under-valued and 
it was to be expected that their gold-price levels would rise as 
currency conditions became more stable. Other countries, such 
as Sweden and Switzerland, had by this time already passed 
through a period of deflation, but, as the decline in certain 
values had been sluggish, their gold-price level was still relatively 
high. In such cases it was equally natural to expect some decline 
in gold prices. For these reasons among others, prices moved 
differently from country to country and it is difficult to speak 
about the movement of the world price system as such. 

In order to obtain some indication of the world movement, 
a study of the movement of prices in countries with more or less 
stable currency conditions during the whole of the period in 
question, or at least from 1924 onwards, is necessary. It should 
be remembered that most of the countries in which prices tended 
to rise are necessarily excluded ; the result is therefore somewhat 
biassed. 

The table is inconclusive. Price reductions seem to be 
somewhat more numerous and considerable than price increases ; 
but, in view of the selection of countries, it cannot be regarded 
as proved that the trend of world prices was downward, although 
the inference that there was a very slight downward tendency 
may perhaps be justified 1 . In the United States, the price level 
declined by about 5 per cent between the first half of 1923 and 
the first half of 1929. A partial explanation of this movement 
was no doubt the bumper crop of 1928, which must have tended 
to depress the price level of 1928-29 one or two points. The boom 
in 1929 was, however, much more violent than in 1923 and a 
slightly higher price level in the latter period might have been 
expected on that account. As prices were actualy lower in 1929 
and failed to rise during the boom period 1928-29, it may be 
reasonable to infer that the trend of prices in the United States 
was slightly downward. (See Chart 9.) 

If it be assumed that world prices were falling slightly, 
the question arises whether this movement tended to provoke 
new maladjustments in various price relations — whether the 
situation in 1928 would have been more stable and the ensuing 
depression less severe had the world price movement been 



to 



1 In the memoranda submitted by the various National Economic Councils and 
Research Institutes, different opinions concerning this question were put forward ; 
it was considered In one or two of them thai world prices had long shown a 
clear downward tendency, in others that I his wns true only from 1926 onwards. 



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different 1 . In trying to form an opinion on this question, it 
must of course be remembered that productivity increased in 
various industries in the period preceding 1928. In Chapter II — C 
above, reference has been made to the estimate that output per 
man in the manufacturing industries of the United States was 
increasing annually by 4 per cent. In view of such an increase 
in productivity, it is difficult to believe that a drop, something 
like 2 per cent annually, in the prices of finished manufactured 
goods in that country exercised any considerable depressing or 
disturbing effect on manufacturing. The price indices for foodstuffs 
remained constant, while raw-material prices declined. This helped 
to make profits in manufacturing industries high. On the whole 
the various price movements in the United States in a period 
of rising productivity exercised an influence on profits similar 
to that of slowly rising prices during a period of constant produc- 
tivity. 

For Europe, less information is available, but it has already 
been pointed out that output per head was probably growing 
rapidly. It is true that this was apparently due to the fact 
that, immediately after the war, economic conditions in Europe 
were disorganised and that rapid improvement during the period 
of re-organisation was therefore relatively easy ; but this does 
not alter the fact that output per head was growing rapidly 
and that a constant or slightly declining price level is thus not 
likely to have placed a dead hand on industry. 

It is of course impossible to judge whether a different price 
movement would have entailed more or less serious malad- 
justments than actually occurred. The figures quoted above 
at any rate furnish no evidence in support of the contention 
that an upward tendency or absolute stability of the wholesale 
price level would have led to a more balanced situation in 1928. 
In some countries, no doubt, there would have been less need 
for difficult adjustments — e.g., of wage rates — and the situation 
would therefore have been more stable. This would probably 
have been the case in Great Britain. In Sweden and Switzerland, 
on the other hand, where the price level was also falling, industry 
was in a not unfavourable position in 1928 owing to the rapid 
increase in productivity and the relative flexibility of their 
economic systems. There seems to be no reason for assuming 
that a higher price level would have made the position in 
these two countries more stable. 



1 It should, be observed that the question under discussion is therefore, not 
whether in the post-war period there is a long downward trend of prices — the 
years 1920-1922 and 1929-1931 would then also have to be considered — but 
simply whether the price movement before the present depression tended to set 
up maladjustments. 



— 96 — 

As productivity develops at different rates in different countries 
and as general conditions vary widely, it is natural to expect 
variations in the movement of wholesale prices from country 
to country. Hence, however the world price system may move, 
some adjustments of international price relations will be necessary. 
As already observed, it is impossible to ascertain what general 
price movement calls for the minimum of adjustment on the 
whole. 

A Maladjustment in Monetary Organisation. 

The movement of prices in different countries discussed 
above helped to produce a maladjustment in the monetary 
systems of the world and in the distribution of gold. The 
actual distribution in 1928 is shown in the following table : 

Table XXIV. — Gold Stocks and Surplus Gold in 1928. 1 
$ (000,000's). 



Country 



| Goirsto lkl 5 "^^ 2 



Argentine ... 
Australia . . . 
Brazil .... 
France .... 
Germany . . . 

Japan 

Spain 

United Kingdom 
U. S. A. ... 



Total of countries given 
World 3 



619 


147 


223 


167 


149 


13 


1,259 


139 


666 


300 


541 


6 


494 


159 


754 


178 


4,141 


1,420 




2,529 
2,676 



In the last resort, international gold movements are due to 
the state of the balances of payments. A tendency towards a 
negative balance under certain circumstances causes an efflux 



1 A! I he end of I Me year. 

1 Surplus of total monetary gold stock over legal minimum gold requirements. 

s Excluding t lie monetary gold stocks of a few countries for which complete 
note circulation figures are not available and whose legal minimum gold require- 
monU therefore cannot be calculated. The approximate amount of these gold 
slocks n( the end. of 1928 was $215 millions. 



— 97 — 

of gold, while a tendency in the opposite direction may provoke 
gold imports. In fact, such movements are certain to occur 
unless the reserves of foreign exchange are used to keep the 
balance of payments in equilibrium. The position of the balance 
of payments in most cases depends mainly on the state of the trade 
balance, which in turn is influenced by the relative level of prices 
and wages in different countries, as well as by the obstacles, 
such as tariffs, which are put in the way of international commo- 
dity movements. The balance of payments is also affected by 
changes in international capital movements. The normal 
working of the gold standard implies that, in a given country, 
an influx of gold resulting from a certain state of the balance 
of trade and of its international capital transactions leads to 
an expansion of credit and a reduction of interest rates. In 
this way, purchasing power is increased and the balance of trade 
moves in a negative direction ; the decline in interest rates, 
further, stimulates the export and checks the import of capital. 
Thus the balance changes ; the inward movement of gold is 
arrested and possibly even reversed. In countries which are 
losing gold, the reverse process takes place. 

Since the war, this mechanism has failed to work efficiently. 
The United States credit did not expand in proportion to the 
gold imported. Such expansion as did take place as the result 
of the influx of gold was used at certain periods for purposes 
of speculation rather than to increase the demand for commo- 
dities ; hence it affected the import and export of goods only 
indirectly and to a limited extent. Further, the sale of foreign 
goods in the United States was made increasingly difficult by 
the introduction of new and higher tariff barriers ; the forces 
making for a reversal of the gold movement were thus checked 
and the influx of gold continued. 

This influx did not of course continue without interruption : 
changes in international capital transaction were not completely 
offset by variations in the trade balance, but led to changes in 
the movements of gold. Increased net lending abroad tended 
to reduce the influx or even cause an outflow of gold — in 1928 
almost $400 million — while a reduction of the lending operations 
caused gold to move to the United States. The closeness of 
the correlation between capital and gold movements is seen 
from Chart 10. 

In the case of France, the increase in gold reserves in 1928 
and 1929, due mainly to a change in international credit 
movements which have been described in greater detail above, 
had little time, before the depression started, to call forth a 
corresponding expansion of credit and thus affect the trade 
balance sufficiently to arrest the inflow of gold. Further, for 






.. 









— 98 



Chart 10. 



Movement of Annual International Balances of Capital, 
Merchandise and Gold of the United States. 






or 



BALANCE OES CAPITAUX 




CAPITAL BALANCE 
GOLD BALANCE 
MERCHANDISE BALAAICe 




BALANCE DES MARCHANDISES 


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a numbef of reasons, the fall in interest rates did not lead to 
an increase in French capital exports such as might have been 
expected in pre-war times in similar circumstances. The fact 
that in 1928 France had enormous floating assets abroad but 
relatively little gold and the continued attraction of gold to 
France under these conditions would seem to reflect the lack 
of stability of the world economic situation in the years before 
the depression. 

Thus, in 1928, the international economic situation — with 
regard to the relation of national price levels, tariffs, international 
lending and the distribution of gold — was undoubtedly suffering 
from a lack of balance 1 . 



1 Other aspects of the monetary situation in the years before the depression 
lira dlicunsed In Chapter IV. 



— 99 — 



F. The Instability of the Economic Situation 
around 1928. 



The economic situation of the world at a given moment is 
never balanced and stable. Hence the instability before the 
present depression cannot in itself be regarded as explaining 
why this depression has reached a degree of severity unattained 
in pre-war crises. The question arises therefore whether there 
was in 1928 any factor which made for an instability greater 
than that normal at other times or before the war. Only if 
that question can be answered in the affirmative is it possible 
to explain the severity of the present depression partly by 
reference to antecedent conditions. 

It is well known that business cycles have been rather 
different in countries in an early stage of economic develop- 
ment and in those with a more mature economic system. 
Hence, it is evident that the economic structure has much to 
do with the character of the cyclical movement. It is therefore, 
a priori, probable that structural changes in the world economy 
will affect the way in which the business cycle develops. It is 
also probable, as has already been mentioned above, that a 
lack of stability or balance may lessen the power of resistance 
of the economic system to the disturbing tendencies of an economic 
depression. Of course, the world may still be prosperous in 
spite of surplus capacity and the existence of maladjustments, 
but this fact — ■ which is borne out by experience — only proves 
that such circumstances are not sufficient to cause an economic 
depression. It does not prove that, when other factors contribute, 
the depression will not be aggravated by unbalanced circum- 
stances. 

Examining the question from the angle of demand, it seems 
probable that factors which make for a stable demand tend to 
mitigate depressions, while those which lead to heavy variations 
in demand tend to intensify them. From this point of view, 
the influence on the present depression of the factors briefly 
discussed in previous sections and also of certain others is 
clearly apparent. 

First, tendencies towards a growing surplus capacity in the 
production of certain important foodstuffs and raw materials 
as well as in manufacturing industries made the situation 
unstable. If in a given industry there has long been a sub- 
stantial excess capacity and the industry has adjusted its 
sales and its replacements policy accordingly, the unstabilising 
influence may not be very serious. When economic depression 



— 100 — 

occurs, the industry need not be more disturbed than it would 
have been had its capacity and output been more normal relative 
to demand. If, however, the productive apparatus has been 
expanding immediately before the depression more rapidly than 
demand, then the sudden arrival of bad trade conditions clearly 
reveals the existence of a considerable surplus capacity, not 
only in comparison with the reduced demand, but also with 
more normal demand. Thereupon, all demand for replacement 
and of course all new investments immediately fade away. 
Moreover, the prices at which the products of such an industry are 
offered for sale are likely to drop much more than would have 
been the case had the sales policy been adjusted to the existence of a 
surplus capacity for a long time previously. Such a decline of prices 
causes a great change in the distribution of income, a fact which 
may upset general demand conditions to a considerable extent. 
For instance, a heavy drop in the prices of primary products 
will reduce the incomes of certain new countries and lead to a 
cutting-down of their demand for manufactured goods from 
other countries. It is necessary to stress the fact that a fail hit 
to realise in time that productive capacity is out miming future 
demand must make for instability of investment. A similar 
influence is exercised by continuous changes in tariff policy 
as well as by the failure of industry in general to adapt itself 
quickly to changing conditions. This instability of investment, 
or in other words the tendency towards a rapid decline in demand 
for investment goods during depressions, is one of the most 
potent factors in intensifying the slump. This point will be 
further discussed in Chapter VI — C below. 

High and increasing inventories are another cause of insta- 
bility. When prices start falling nobody wants to carry stocks 
and "therefore everybody is anxious to reduce their actual stocks 
as quickly as possible. Thus, the greater the slocks the more 
quickly will the demand for new commodities fall off. If large 
quantities or commodities are in the hands of loose monopolistic 
organisations which are apt to break down once the decline of 
prices has begun, then the position is all the more unstable. 
The volume of commodities put on the market will then be 
subject to a large increase at the very time when demand is 
restricted. As a matter of fact, the existence of such organisations 
may well increase instability even if they have not led to a 
piling-up of stocks but only to a previous restriction of output. 
The break-up of agreements to restrict production may under 
certain conditions lead to increased output at the very times 
when demand is falling and may thus affect prices in very much 
the same way as the. existence of large stocks. On the- other 
hand, strong organisations which control output in such a way 



— 101 — 

that abnormal stocks never accumulate may exercise a stabilising 
influence. 

The lack of balance in the situation may lie, not only in surplus 
capacity or large stocks, but also in an unbalanced price system. 
The relative prices of different commodities or commodities at 
different stages of production and of the various factors of 
production may have a more or less abnormal relation to one 
another. If, for instance, cost elements are not adjusted to one 
another and to prices, production may be unprofitable ; a further 
decline of prices when the depression advances may in consequence 
be more serious than it would otherwise have been. Naturally, 
if through one circumstance or another, production does not 
pay even under good trade conditions, the financial position 
of the companies and firms concerned is weakened. Hence, the 
arrival of a depression is likely to endanger their future existence, 
to deteriorate their credit, and lead in some cases to reconstruc- 
tions and bankruptcies. Although such financial processes need 
not necessarily affect productive activity, in very many cases 
they will in fact do so. A weak financial position of conside- 
rable groups of industries must therefore tend to intensify 
an economic depression. In some cases this is what actually 
happened. Before the depression, production was being conducted 
at a loss in, for instance, large sections of the British cotton 
and coal industries. Unadjusted costs may also mean exceptionally 
large profits, a fact which under certain conditions tends to 
stimulate new investment and create surplus capacity. The 
failure of adjustment of various cost elements is often approached 
from a special angle. Manufacturers feel that taxes and social 
charges are too high and are chiefly responsible for the fact that 
total costs cannot be reduced to a profitable level. There is, 
however, no reason why taxes and social charges should be 
regarded as the residual element to be satisfied only when wages 
or any other charges have been covered. Certain elements in the 
cost accounts are, it is true, always more or less fixed. Difficulties 
arise if there are not the required number of sufficiently flexible 
cost items, allowing an adjustment of total costs to a level in 
correspondence with selling price. 

A special example of the failure of the various cost elements 
to adjust themselves to one another was to be found in Central 
Europe, where rates of interest were, for well-known reasons, 
on a very much higher level than before the war. The effect 
of this on the profitableness of new technical processes, neces- 
sitating an outlay of capital, and of long-time investment in 
general — for instance, in buildings — does not seem to have 
been always sufficiently realised. In some cases, investments 
were made in very much the same way at an interest level 



- 






— 102 — 

of 10 per cent, as it might rightly have been if the rate had 
been only half this figure. When productive capacity can be 
fully utilised, such expensive capital investment may have no 
serious effects ; when, however, during an economic depression 
plant can no longer be worked full time, the necessity of paying 
high rates of interest is likely to bear heavily on the financial 
position of the industries concerned. 

The divergence between the movements of wholesale and 
retail prices is often quoted as an outstanding example of an 
incomplete adjustment of prices and costs in the post-war 
economy. In most countries, retail prices fell much less than 
wholesale prices during the early post-war depression and in 
a great many they remained considerably above the level of 
the latter throughout the whole period under review. 

Although for various reasons the real margin is considerably 
smaller than it appears when current indices are studied, 
comparable indices computed for certain countries show beyond 
doubt that retail prices had in 1928 risen more since pre-war 
times than wholesale prices. The existence of this wider margin 
has frequently given rise to the argument that by not passing 
price reductions — in foodstuffs for instance — - on to the final 
consumer, the retailer has prevented that expansion of demand 
which would have helped to sustain the prices of the primary 
products. But the continued spread between wholesale and 
retail prices is largely due to the fact that the changes in the 
cost of retail distribution since pre-war days have not followed 
the same course as the changes in the cost of production of the 
commodities handled. Great technical advances were made in 
the production of all classes of goods, while corresponding 
advances were not made in methods of retailing. In many 
countries, the distribution system is still characterised by the 
existence of large numbers of small establishments operating 
with small turnover and high costs ; such establishments indeed 
have increased considerably in number since before the war. 
For this and other reasons, little reduction in the costs of 
retailing has been possible. At the same time, many of the 
changes that have been effected in the character of retail trade 
since before the war have been in the direction of increasing 
costs. Better service is demanded ; the practice of delivering 
goods and calling for orders has spread, and a greater proportion 
of goods is now sold on credit. Finally, consumers have been 
increasingly reluctant to buy in shops which do not display 
their goods attractively and with costly fittings. 

It is I rue, however, that the costs of distribution have risen 
compared with the costs of production for another reason as 
well : wages in the transportation, building and retail trades 



— 103 — 

have risen considerably more than wages in manufacturing 
industries and in agriculture in most countries. This means 
that workers in the former occupations have been able to increase 
their consumption somewhat at the expense of consumers in 
general. It does not seem probable, however, that this change 
in the distribution of income has affected demand in such a 
way as to create, in itself, a serious discrepancy between demand 
and supply conditions. Hence, neither this circumstance nor 
the fact that retail costs have not been subject to the same 
reduction as production costs in terms of human effort seems to 
afford evidence of a lack of balance creative of instability in 
the years before the depression. 

Another factor of a somewhat different character which 
undoubtedly also helped to make the position in 1928 unstable, 
by increasing the chances of considerable changes in economic 
relations, was the position of Bussia. As later experience has 
shown, Russia was able to appear suddenly on the world's 
markets as a great exporter of certain commodities, such as 
timber and wheat. The additional supplies thus placed on the 
world markets naturally tended to unsettle the balance that had 
been reached. On the other hand, these sales rendered Russia 
a market for machinery and other commodities. 

In recent years, the obstacles to international migration 
have been much greater than before the war. Countries witli 
a large excess of births over deaths have only to a limited degree 
been able to alleviate the pressure of a rapidly growing population 
through emigration. It is doubtful, however, to what extent 
this fact made the economic situation in post-war years less 
balanced than it would otherwise have been. The farming 
population and the production of foodstuffs in Europe might 
have been reduced through emigration to oversea countries, but, 
if the immigrants had been employed on the land, the tendency 
towards over-production of foodstuffs would have been streng- 
thened. Whether increased emigration from Europe would 
have reduced unemployment in manufacturing industries there 
is uncertain. 

It has been much discussed whether the post-war economic 
world possessed a smaller psychological stability in general 
than during pre-war times. It has been said that the experiences 
during and after the war of sudden and forcible changes could 
not but make people prepared for new violent disturbances. 
Thus, it is argued, a drop in prices would be less able to call 
forth demand now than before the war, because society had 
got used to considerable price changes. Unfortunately, it is 
scarcely possible either to prove or disprove that changes of 
this sort have taken place. The conspicuous lack of confidence 






— 104 — 

towards the end of 1930 and in 1931 may be the. result of the 
depression, and not the consequence of a weakened psychological 
stability in existence before the depression started. The optimism 
in the spring of 1930, which put a brake on the slump in economic 
activity, tends rather to substantiate the view that the business 
psychology had not become more hesitant or unstable. The 
gravity of political events and the instability of financial condi- 
tions could not, as the depression proceeded, but create a wide- 
spread feeling of pessimism. 

The lack of balance and the structural changes which have 
been described above do not of course in themselves explain 
the depression which followed. As already mentioned, the 
world is never balanced or stable, and yet periods of prosperity 
succeed periods of depression. It seems certain, however, that, 
if such factors as have just been described are at work, depressions 
caused by other factors will be intensified. Consequently, the 
following account of the present depression cannot be given 
except against the background of at least a very brief description 
of the economic situation of the world in the immediately 
preceding years. 



■*— ^"—^^^^^ 



Chapter III. 

BUSINESS-CYCLE TENDENCIES IN THE LAST 

DECADE. 



In the previous two chapters, some observations have been 
made on the influence of changes in the structure of the economic 
organism. It is usual to make a distinction between factors 
causing such structural changes and cyclical factors which 
lie behind the wave-like movements of trade — usually described 
as the business cycle. This is a somewhat vague distinction : 
among other reasons, because economic science has not yet been 
able to ascertain the causes of this cyclical movement. Most 
economists agree, however, that business-cycle tendencies are 
connected with variations on the capital market — i.e., in the 
relation between savings and investment and in the production 
of producers' and consumers' goods. There seems to be a certain 
uniformity in the variations of these elements which make it 
fruitful to group them under the heading of factors making for 
cyclical trade fluctuations, while treating such circumstances as 
new tariffs, inventions, and new tastes as belonging to a different 
group of factors which have a more or less constant influence on 
the structure of the economic organism. Evidently, this distinc- 
tion is auxiliary to the handling of the enormous mass of material 
which must be considered in any account of economic develop- 
ments. The economic situation is never affected by changes in 
factors of only one kind. On the contrary, all trade fluctuations 
are under the influence of both types of variations. 

Changes in the volume of output in manufacturing industries 
and in the volume of trade are the chief characteristics of business 
fluctuations. Such changes, which are constantly recurring, vary 
greatly in degree. The depression in the year 1903 in the United 
States, which was hardly noticeable in Europe, can be quoted as 
an example of a minor trade fluctuation. The booms in 1900 and 









— 106 — 

1907 and the following depressions were a little more pronounced, 
but less pronounced than the depressions in the 'seventies and 
'nineties of the last century. It is probable that the severity of 
these earlier depressions was due to the fact that cyclical factors 
made for a slump under conditions which structural factors had 
made extremely unstable. In other words, in such cases it is 
correct to diagnose a combination of structural and cyclical 
depressions. 

Many economic authorities believe that the pre-war cyclical 
fluctuations in trade occured fairly regularly at intervals of about 
forty months and that there was a tendency towards a business 
cycle of this kind in all countries which had reached a certain 
stage of industrial development. 

The course of events during the last fifteen years has been 
so largely determined by the destruction and dislocation caused 
by the war that the underlying forces of a cyclical character have 
been in a large measure concealed. Indeed, their very existence 
has been denied. A brief study of the economic development of 
certain individual States may, however, help to throw some of 
the underlying forces into relief. 

The feverish post-war activity was followed by a severe 
depression in 1920 and the following years. It was much more 
pronounced in certain countries than in others. In some, a 
fall in the price level aggravated conditions, while inflationist 
countries suffered less owing to the stimulus given by rising 
prices. General recovery came surprisingly quickly. In 1923, 
commodity prices nearly everywhere stopped falling and busi- 
ness conditions improved. In England, the Netherlands, Swe- 
den, Italy, Czechoslovakia, Brazil and the Argentine, definite 
recovery seems to have begun some time in the second half of that 
year, while in other countries it had already been in progress 
for some time (Denmark, Austria, Australia). In the United 
States and Canada, where the improvements had started in 
1922, the summit of a minor cyclical wave was passed in the 
middle of 1923 ; and these countries entered upon a brief phase 
of declining activity. 

The 1924 recession in North America was not felt in European 
countries. Thus in England, Sweden, Norway, Switzerland, 
France, Italy, Spain, Germany, Czechoslovakia, Portugal and also 
in Brazil, the Argentine and Australia production was increasing. 

Some European countries were reeling the effects of the 
initiation of a policy of deflation, and Poland, Estonia, Hungary, 
Roumanin and ["inland were faced by special difficulties; but 

these difficulties were not directly related to the temporary 

decline in the economic activity 01 North America. 

The year L025 was marked rather by a tendency towards 






— 107 — 

decline. In many countries, economic activity was adversely 
influenced by the effects of deflation or stabilisation. The United 
Kingdom, Finland, Poland, Austria, Hungary, Norway, Belgium, 
Switzerland, Portugal, Brazil and Australia experienced recessions 
varying in intensity. Conditions in the United States and France 
were active, but a temporary decline could be observed in the 
middle of the year. Czechoslovakia was nearing the end of a 
cyclical expansion. In Germany, the upward movement stopped ; 
the second half of 1925 saw a rapid decline. On the other hand, 
Canada, Spain, the Argentine, Japan and India were still in the 
upward phase of the cycle. 

In the last quarter of 1925, production in England registered 
an advance which was more than seasonal and continued until 
1926. But the coal dispute and later the general strike in 1926 
paralysed all branches of production. These events, however, 
tended to benefit for the moment certain countries such as 
Germany, Belgium, Sweden and others whose products directly 
competed with those of the United Kingdom. In other countries 
special depressing factors were at work — e.g., production in 
France, Spain and Italy began to recede, largely on account 
of monetary difficulties. 

During the year 1927, the movement was much more uniform 
and general — internationally — than at any other time since the 
post-war depression. Currencies were stabilised and the gold 
standard or gold exchange standards adopted by most of the 
countries which had not done so before. There was a clearly 
marked tendency towards expansion of production and trade. 
Only countries where monetary factors were adverse (e.g., France, 
Italy, Denmark, Norway, Roumania, Brazil, Japan) or where 
civil disturbances occurred (e.g., China) failed to share or to share 
fully in the increasing prosperity. In France and Italy, the 
deflation crises were overcome and the third or fourth quarter 
of the year brought a certain revival. Some countries — e.g., 
Australia — enjoyed a high degree of prosperity. It was only in 
the United States and in Canada that the second half of the year 
showed a short and relatively mild recession ; it came about three 
and a-half years after the previous recession in 1923-24, thus 
making a cycle of almost forty months. The temporary standstill 
and re-organisation of a leading firm in the automobile industry 
exercised a depressing effect just at that time. 

The general improvement in the world economic conditions 
is reflected in the behaviour of capital markets. The international 
movements of gold changed their direction and went from west 
to east ; easier money-market conditions were experienced 
on the important markets. Security prices rose substantially in 
most countries. The rapid decline on the German stock exchange 






— 108 — 

was exceptional and was caused by action on the part of German 
authorities directed to this end; some other markets, however, 
I ol lowed the German lead. 

The tendencies to expansion observed in 1927 continued in 
1928 and, on the whole, were intensified. In some countries, 
industrial activity as well as transactions and quotations on 
the stock exchanges attained boom proportions. In others, 
however — as, for instance, in Germany and certain cereal- 
producing countries — there was no further rise in the volume 
of manufactured products, but on the whole the level reached 
was maintained. Australia was an exception. The bad crop 
in the winter of 1927-28 exercised a depressing influence. In 
Finland, a slump in prices of timber and a financial crisis in 
the. building industry caused a certain recession. Industrial 
production in England declined in the first half of the year; but 
in all probability this was only a temporary reaction from the 
exceptional activity in 1927 which followed the coal dispute. 

In the absence of important monetary or other causes making 
for a development along independent lines in individual countries, 
the tendencies towards a similar movement of business conditions 
grew in strength. 

The beginning of the year 1929 was very favourable in most 
countries. It is true that in Poland, Hungary, the Argentine, 
Canada, Czechoslovakia, Switzerland, production either remained 
stationary or even showed a somewhat declining tendency. 
Elsewhere, however — in the United States, England, France, 
Germany, Sweden, Japan and others — production continued 
to increase in volume ; in some branches of industry and in 
certain countries, hitherto undreamt-of levels were attained. 

As the year advanced, however, production tended to fall 
off and, when the New York Stock Exchange collapse occurred, 
one country after another was drawn into the vortex. Pro due- 
lion and trade contracted almost all over the world. 

Chart 11 may help to render clear the changes in business 
conditions which took place. 

The direction of the lines shows the tendency of the changes, 
and their density the intensity of the business activity. 

Thus, the rising or falling lines indicate that business activity 
was moving upwards or downwards. The horizontal and the 
vertical line's show that the level of activity was fairly stable 
On a low and a high level, respectively. In other words, horizontal 
lines indicate that the country was suffering from a depression 
which on the whole grew neither better nor worse 4 , while, the 
Vertical lines signify prosperity at a constant level. The darker 
the shading I he deeper the depression; the lighter the shading 
the belter the business com I i lions. 




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This graph requires to be interpreted with care. It is intended 
to #ive only a general picture and certainly not an exact descrip- 
tion of conditions in various countries. It does not make possible 
a comparison of the intensity of the depression or the boom 
as between the various countries at a given date. 

The general impression conveyed is that there was very 
little uniformity in the movement of business conditions in 
different countries during the last decade, especially before 1927. 
Only in a few countries — such, for instance, as the United 
States, Great Britain, Canada and Czechoslovakia — can a 
cyclical movement with a period of three to four years be observed; 
and even in these cases the movements did not synchronise. 

This impression is confirmed by a study of the indices of 
the volume of production for the years 1924 to 1928, which are 
reproduced on Chart 12. The minor trade fluctuations in the 
post-war period seem to have proceeded in an entirely different 
way in different countries. It was only in 1927 that they began 
to coincide more nearly with one another (although in some 
cases in a very hesitating manner), until the present depression 
broke out simultaneously in a large number of countries in the 
autumn of 1929. 

Among the many statistical series of a financial character 
which might be considered, only one will be included in the present 
chapter, namely the movement of bond yields. Here again, as 
shown by Chart 13, the movements were far from uniform. 

Reasons for this lack of uniformity are not difficult to find. 
Under certain conditions, national factors tend to dominate. 
They are obviously likely to do so during periods of domestic 
inflation or deflation. It has already been mentioned that the 
crisis in 1921-22 was much more severe in countries which pursued 
a policy of deflation than in those where prices, after a temporary 
setback, resumed their upward movement. Finland almost escape! I 
this crisis owing to the fact that it maintained a stable price Jewel 
from 1920-1922. Another example of factors making for different 
business trends in different countries is that an increase in the 
import of capital exercises a stimulating influence of very much 
the same sort as a mild inflation, while a considerable increase 
in the export of capital may tend to have a reverse effect. 

Structural changes, such as the loss of foreign markets, must 
necessarily tend to depress conditions in the country in which 
they occur. Thus, economic conditions in Austria were seriously 
affected throughout the last decade by the erection of new 
tariff's in surrounding countries, which shut off a large part of 

Austrian industry from their pre-war markets. 



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— 112 — 

Chart 13. 
Yield of Bonds in Various Countries. 













ROUMANIE 












ROUMAMIA 












CHINE 




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1926 1927 1928 1929 1930 



Simiicc : StotMloal Yvtf Bnok »/ '/»• Lttegm "/ Nations. 



— 113 — 

In countries which are much dependent upon one or a small 
number of agricultural commodities, crop variations have often 
changed the whole aspect of the business situation. 

National factors strong enough to dominate the economic 
situation in an individual country may of course also move in 
cycles. The changes on the capital market and in the field of 
investment which make for a business boom may at certain times 
be very strong and override the depressing effects of unfavourable 
circumstances abroad ; at other times, the cyclical downward 
swing may prove stronger than the stimulus given by favourable 
foreign factors. The influence of conditions abroad on any given 
eountry is usually simple ; good as well as bad business conditions 
tend to spread. In other words, the tendencies are contagious. 
The reasons for this are obvious. It goes without saying that 
the contagion is especially pronounced between certain groups 
of countries that have more intimate relations with one another 
than with others. 

It would carry us too far to enter upon a further analysis 
of the various actions and reactions in international economic 
relations from the point of view of trade fluctuations. It is 
obvious that uniformity of movement in all countries can only 
be expected when the domestic factors in many important 
countries work in the same direction at the same time. Even 
then the uniformity will be chiefly one of direction and will not 
apply to the character of the business situation nor to the time 
when the various tendencies began. The structure of economic 
life in each country largely governs the character both of booms 
and of depressions. Experience of this and earlier depressions 
shows that countries such as Great Britain and Italy that are more 
dependent on conditions elsewhere suffer more from a worldwide 
depression than do the more self-contained territories like France. 
This of course is only true if the national factors in countries 
of the latter type do not make for a very severe slump, as seems 
to have been the case on this occasion in the United States. It 
is also self-evident that a depression has very different effects 
in agricultural countries from those in countries chiefly dependent 
on manufacturing industries. Even in the former, however, 
there have been important differences between those producing 
chiefly cereals and those which concentrate on animal foodstuffs. 

A study of trade fluctuations in pre-war times corroborates 
these conclusions reached from an analysis of the movements 
in the last decade. There was very little uniformity in the move- 
ment of trade conditions so far as the minor fluctuations are 
concerned before the war. The national factors were evidently 
more important than the foreign influences, which no doubt 
partly Ousel one another. There may have been a tendency 



— 114 — 

towards a forty-months cycle before the war, but, even if this 
is true, that tendency has "frequently been counteracted in one 
country or another by other factors. Even those countries 
which display the best evidence of such a cycle have experienced 
periods when the upward swing almost failed to make itself 
apparent owing to the influence of structural factors of a depress- 
ing character. This was the case, for instance, in the middle of 
the 'nineties in the United States. 

In certain agricultural countries — as, for instance, Russia — 
even the major trade fluctuations which culminated in the crises 
of 1900 and 1907 had very little effect. This fact does not imply 
that Russia was unaffected by conditions abroad, but only 
that crop variations and changes in the price of wheat, which 
were far from following the movement of business cycles abroad, 
exercised a predominant influence. The case of Russia was, 
however, somewhat extreme. 

On the whole, the major trade fluctuations before the war 
asserted themselves almost everywhere, and the more pronounced 
the boom or the depression, the more similar the movement in 
different countries. However, the similarity may easily be 
exaggerated. So severe a crisis as that which occurred in Europe 
in the year 1900 had very little influence in the United States 
and is hardly noticeable on the production curves in that country. 

It is useful to bear in mind one further fact concerning the 
major trade fluctuations before the war in any study of post-war 
tendencies ; the period between the highest and lowest points 
of the waves was far from constant. According to a well-known 
study of the business cycle in Great Britain 1 there were periods 
of 3, 5, 7 and 8 years, and two periods of 6 and 10 years, between 
the peaks from 1857 to 1912. Between the low points there 
was one period of 7 and one of 11 years, two periods of 9 and 
three of 5 years. This certainly lends no support to the idea 
of regularity in the major trade fluctuations. 

A study of both pre-war and post-war conditions thus leads 
to the conclusion that trade fluctuations do not proceed in a 
regular fashion ; nor are they similar in all or in the majority 
of countries except on very rare occasions. Such rare similarity 
is more surprising and more in need of explanation than the 
differences at other times. Certainly in the last decade — a 
period of unusually strong nationalism —e.g., as regards finance, 
tariffs, etc. — very little uniformity can be observed as far as 
the minor trade fluctuations are concerned. But in the post-war 
period, though the minor fluctuations in economic activity 



1 Sec Mil clu'l : " BuslflMH Cl/ilHS. Thu I'ldhlnn itml its Setting 
I!I27. p. 372. 



New York, 



— 115 — 

varied widely from country to country, the two major depressions 
of the decade — that of 1920 and that of 1929 — made themselves 
felt throughout the whole compass of the globe, and it is with 
this type of phenomena that the present study is mainly 
concerned. 



Chapter IV. 



THE PHASES OF THE PRESENT BUSINESS CYCLE 



A. Bird's-Eye View of the Cycle. 

The analysis in the last chapter makes it clear why it is 
difficult to state which year marked the beginning of the present 
business cycle which culminated in 1929 and has shown a marked 
downward tendency during the last two years. In most countries, 
business conditions were improving from 1926-1929 with only 
a slight interruption in certain of them during the latter half 
of 1927. But agriculture is of course subject to special meteoro- 
logical influences which may not coincide with the business 
cycle. As described in Chapter II, the depression tendencies 
had begun to make themselves felt in agriculture as early as 
1928. For some time the increasing fall in prices was checked 
by keeping produce off the market and by accumulating stocks, 
but farm incomes were smaller in the 1928-29 period than in the 
preceding year. After the turn of the business cycle in 1929, 
the decline in the purchasing power of other industries caused 
a reduction in the demand for certain foodstuffs and the existence 
of large stocks during such a period intensified the drop in the 
prices of many foods. Hence, the situation of agriculture became 
more serious than it would otherwise have been, and the last 
two years have been characterised at least as much by an agri- 
cultural depression as by a business cycle recession in manu- 
facturing industries and trade (See Chart 14.) 

It is of course impossible to give a precise date at which 
the business cycle turned downwards, but Chart 14 suggests 
that, viewed from a world standpoint, a change was taking 
place in the early autumn of 1929. Since that time the value of 
world trade and the wholesale price-index of commodities traded 
in, intcrnnlionully have been subject to a continuous decline. 
Other data Of importone^ lor judging Ihe movement ol* business 



117 



Chart 14. 

The Value of the International Trade of Forty-five 

Countries, 1927-1931. 1 



6.000 h 



5.000 



4.000 



3.000 




1 I I 1 * I I I . I .. I 



1927 



1928 



1929 



1930 



p^m^p^n m *. i i i i iw ii i i m»nraii i ij»iwn 



■WWW 



1931 



mtmmmm* 



conditions show a less regular development. The indices of the 
volume of production in manufacturing industries in certain 
countries given in Charts 15 and 16 indicate that the rate at which 
the depression has been proceeding has varied greatly from 
time to time. 

If the two years since the summer of 1929 be divided into 
four characteristic periods, the first would embrace the last 
half of 1929. Production curves in the majority of countries 
were already falling during the third quarter of the year, and, 
after the stock-market crash in New York, which brought about 
a dramatic fall in stock-market quotations in other countries 
also, the depression gathered strength and proceeded rapidly. 
(See Chart 17.) 

At the turn of the year, there was a tendency in financial 
and business circles, particularly in the United States, to take 
an optimistic view of the situation and to assume that the depres- 



1 Total imports and exports in millions of dollars ; adjusted tor seasonal 
vnrial ions. 



— 118 



— 119 



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Prices of Industrial Shares, 1927-1931. 
(1926 = 100.) 



ROrAUM£-UW- UNITED KINGDOM 




I I. I I I I I I M I I I I I I I I I I I I 1 I I I I I 1 t 1 I I I 1 I I I 

1927 1928 1929 1930 1931 



j a Jttft* > ij t 



Source : League of Notions Monthly Bulletin of Statistics. 



120 



121 



sion would be of short duration. The export of capital from 
lending countries increased and a considerable rise took place 
on the stock markets. In the spring, the rate at which production 
was declining slowed down in most countries ; there was even 
an improvement in the United States which went beyond the 
normal seasonal improvement. During this second period, which 
lasted till the summer of 1930, manufacturing countries other 
than the United States had felt relatively little of the depression 
compared with those producing crude foodstuffs and raw 
materials. Gradually, however, one manufacturing country after 
another was drawn into the rapid downward movement in the 
last half of the year. Curves of production, trade, stock-exchange 
quotations and commodity prices turned decisively downwards, 
and international capital movements on long term practically 
ceased. Certain countries such as France and the Scandinavian 
group, in which business conditions had been good up to the 
summer, now began to feel the influence of reduced demand 
abroad, while the depression grew more and more severe elsewhere. 
(See Chart 18.) 

In the beginning of 1931, the course of events of the preceding 
year was to a large extent repeated. The rate of the depression 
slowed down considerably. The volume of output in manufacturing 
industries increased seasonally and in some countries — such 
as the United States — even a little more. Pessimism became 
less acute and speculative shares rose rapidly on the stock 
markets. In many quarters, hopes were nourished that this 
improvement was to be the beginning of a real recovery. These 
hopes were, however, not justified. In May, the situation some- 
what suddenly changed for the worse. Political and financial 
events caused discouragement and a withdrawal of foreign funds 
from borrowing countries took place on a considerable scale. The 
discrepancy between interest rates in these and in lending 
countries increased. (See Chart 19.) 

A feeling of pessimism was again dominant and the depression 
deepened in practically all industries and all countries in course 
of the summer. During these months the depression seems to 
have proceeded a little faster in Europe than elsewhere and 
conditions in many European countries thus became almost as 
unfavourable as elsewhere in most other countries. 



B. The Boom. 

It has already been stressed in Chapter III that business 
conditions during the year preceding the turn in 1929 varied 
widely from country to country. 



\ 



Chart 18. 
Wholesale Prices. 



mi 



HA6 



ms 





am 



1927 



1928 



1929 



1930 



1951 



Source : League of Nations Monthly Bulletin of Statistics. 



— 122 — 



Chart 19. 



Market Discount Rates in Six Countries and Call Money 

in New York. 

(Minimum Rates > and Call Money (Renewals) Average Rate.) 




Source : League of Nations Monthly Bulletin of Statistics. 



1 For Switzerland in 1928 the average rate is shown. It is only slightly higher 
than the minimum. 



123 — 



The boom was more pronounced during 1928 and 1929 in 
the United States than elsewhere. The output of producers' 
equipment rose enormously, and much more than that of con- 
sumers' goods. Among the latter it was chiefly those of a durable 
nature and belonging to the so-called new industries such as motor- 
cars, radios, refrigerators, etc., the production of which increased 
the most. This fact probably had some connection with the large 
profits realised on stock-exchange speculation which were partly 
used for the purchase of more expensive consumption goods. 
In other countries, there was also an increase in production 
during these years, but boom conditions were felt to a less extent. 
Unemployment was on the whole declining, though it remained 
on a relatively high level. In countries where agriculture 
played a large role, the reduction in the purchasing power of 
farmers from the beginning of 1929 counteracted the boom 
tendencies which might otherwise have developed. For Great 
Britain, the unsatisfactory conditions on certain overseas markets 
had a similar influence. In Italy, the progress realised from 1927 
to 1929 was relatively great, but this was probably due more to 
the fact that the antecedent deflation of the price level had 
adversely affected conditions in the first year than to a real 
boom in the following two years. 

The position of Germany was exceptional. The rise on the 
stock market had been broken as early as 1927 by a credit restric- 
tion deliberately imposed by the Central Bank. From the end 
of that year the domestic market weakened, although production 
and trade were maintained on a relatively high level. Towards 
the end of 1928, the easing of credit conditions, and the 
influence on German exports of good conditions abroad brought 
some improvement, and after the end of the unusually severe 
winter a considerable upward movement took place. The increase 
in production during the whole period 1926 was much greater 
in industries manufacturing producers' goods than in those 
manufacturing consumers' goods. This fact was due partly to 
the large foreign demand for machines and other manufac- 
turers' equipment and partly to the rationalisation movement and 
the large volume of construction within Germany. 

It is one of the characteristics of this upward swing of the 
business cycle 1926-1929 that important industries producing 
consumers' goods — for instance, the textile and boot-and- 
shoe industries — were never able to utilise their capacity to 
the full. In the United States, their production increased 
somewhat, as may be seen from the following table, but in certain 
other countries there was no increase at all. In Germany there 
was, indeed, a substantial reduction of output in the textile and 
boot-and-shoe industries after 1927. 



124 



Table I. — Index of Industrial Production in the United States. * 
(Monthly averages, seasonally adjusted, December 1927 = 100.) 



Monthly 
average 


All 
manufac- 
tures 


Iron 
and 
Steel 


Aulo- 
mo biles 


Textiles 


Leather 
and 
Shoes 


Food 
products 


1927, Dec. . 

1928, June . 
» Dec. . 

1929, June . 


100 

111 

117 
129 


100 
121 

131 

165 


100 
153 
197 
219 


100 
103 
106 
116 


100 

104 

97 

108 


100 

97 

109 

100 



Thus, the boom was rather a typical investment boom than 
a consumption boom. It is true that the output of the motor 
industry, the radio industry and some other new industries grew 
very rapidly, but the increased purchases of such commodities 
required investments of savings no less than the purchase of 
machinery. In other words, durable commodities, whether 
intended for production or for consumption, were increased in 
quantity to much greater extent than such less-durable consu- 
mers' goods as textiles and foods. It follows that a larger part of 
total income was saved and used for investment during the boom 
period than during the preceding years. 

In almost all countries, the period under review was charac- 
terised by an exceptional volume of construction and a very 
large investment in new roads. Many economic authorities 
hold the view that this fact was one of the fundamental conditions 
of the intense activity in the three or four years before this 
depression. There was an urgent need of new roads, houses, 
motor-cars, etc., which, to be satisfied, required an enormous 
investment of new capital. During such periods of large invest- 
ment, boom conditions seem to develop more easily than during 
periods when investment constitutes a smaller proportion of 
total output. 2 

In the discussion concerning price movements in Chapter II 
— E, it has already been mentioned that prices of manufactured 
goods failed to rise in the years 1928 to 1929. In many countries, 
such as the United States and Germany, they were even subject 



Source : Federal Reserve Bulletin. 
See Chapter VI — E. 



— 125 — 

to some decline. For instance, the index of finished products 
dropped from 107 in September 1928 to 104 in July 1929 in the 
United States. Raw material prices (compare Chapter II — B.) 
also fell somewhat. It should be emphasised, however, that 
throughout this period the prices of both finished products and 
raw materials, as well as prices of farm products, were on a 
higher level than in the summer of 1927. The highest point, for prices 
of farm products and raw materials was reached in May 1928, 
and for prices of finished products, in September 1928. The fact 
that prices turned downwards long before the culmination of 
the boom is clearly shown by various indices of sensitive prices. 



Table II. — Quantum and Value of World Trade 1925 - 1929. * 



Prices (gold) 
Quantum . . 
Value . . . 



1925 


1926 


1927 


1928 


1929 


100 


93.5 


91 


90.5 


88 


100 


103 


111 


115 


120 


100 


96 


101 


104 


105.5 



The general increase in production was reflected in an expan- 
sion of foreign trade. The table above shows that the increase 
in the quantum of trade was much larger than in the value. 
World-market prices of commodities traded in internationally 
fell rapidly from 1925 to 1927 and a little in the two following 
years. Here, again, the tendencies were of course different in 
different countries. Chart 20 illustrates the changes which 
took place from 1927 to 1929 in countries for which indices 
of the volume of trade are available. They require no special 
comment. 

One of the most important aspects of business conditions 
during a boom is of course the movement of profits. Unfortu- 
nately, the evidence available is rather unsatisfactory. The general 
impression obtained from a study of this evidence is that profits 
rose substantially from 1927-1929, but much less than the stock- 
exchange prices. According to figures compiled by the National 
City Bank of New York, total net profits in six hundred American 
corporations were 22 per cent higher in 1928 and 39 per cent 
higher in 1929 than in 1927. It may be added that they were 
27 per cent higher in the first half of 1929 than in the first half 
of 1928, 2 while they were 14 per cent higher in the third quarter 
of 1929 than in the third quarter of 1928. It is interesting to note 
that the increase in profits in the in o tor-car industry, clespile ils 



1 SoiiiTo : J.mcfiir <>/ Nations Memorandum on ProduUUm and Trade 19254929. 
" Bused <iii figurus for iilioul 9(10 corporations;. 



— 126 — 

Chart 20. 
World Trade. — Indices of Exports. 



IM- 



!C 



M 



too 




/TAL/E-ZTALV 

rcxeCOSL OI/AQV/E 
CZECHOSL OVAKAA 
f/NLAA/OS 

^"VLAWD 



20 





J?0 



IFO 



, \AUST7>Alte 
' \AV6r#ALfA 

i woe -MO) a 

AfOl/y.- £££ANDE 

H£W ZfAlAAlD 

4 f frATS-t/NtS DAM 



m 







IS V 



1926 



1929 




I3Z7 



1928 



IMS 



J O.M rrtei Sit 



— 127 — 



rapid expansion, were only about two-thirds of the averages 
given above. 

In an account of business conditions during a boom period, 
it is necessary to pay special attention to the conditions on the 
capital market, as phenomena of speculation and credit are 
closely related to the general expansion. The first twelve months 
after the summer of 1927 were characterised by an easing of 
credit conditions, not only in the United States, under the 
influence of a deliberate policy by the Federal Reserve authorities, 
but in other countries as well. This easing of the money markets 
was one of the fundamental conditions of the general upward 
swing of business, which began or was stimulated during that 
period. The Federal Reserve system on this occasion led the 
way in a policy of cheaper credits, with the consequence that, 
in the thirteen months following May 1927, there was a net 
export of gold from the United States of no less than $600,000,000. 
The credit expansion which took place during this period in 
the United States went largely to the financing of speculation. 
According to available statistics, no less than 86 per cent of the 
total increase in bank credit was used for that purpose. Thus 
the foundation was laid for the stock-exchange boom which 
followed. 

In the summer of 1928, the credit situation changed both in 
the United States and in the rest of the world. The American 
boom in construction, in the motor-car and other industries and 
on the stock market, led to a stringency on the money market 
and to an effort on the part of the Federal Reserve authorities 
to counteract the speculative movement. The excesses to which 
speculation had gone is illustrated, for instance, by the low yield 
of shares. As late as in September 1929, the average yield of 
industrial shares was less than 3 per cent, according to compu- 
tations by the Standard Statistics Company. To counteract 
these tendencies, discount rates were raised and large sales of 
securities by the Federal Reserve Ranks took place. Further, 
commercial banks in New York were persuaded not to lend 
money to the stock market. However, private money was 
attracted to the stock market by the high call loan rates, which for 
long periods averaged 8-9 per cent. This restriction of credit 
and the consequent high rates on the money market also attracted 
foreign funds and led to a reduction of American short-term 
investments abroad, while the issue of foreign securities in New 
York had already become much reduced at an earlier stage of 
the stock-exchange boom. These capital movements naturally 
affected the balances of payments of various countries, not so 
much by changing the imports and exports as by reversing the 
gold movement. In I lie killer hill' of 1928, the gold slocks of 



— 128 — 

the United States remained almost constant, but from January 
to October 1929 they rose by more than $300,000,000. 

At about the same time, considerable amounts of gold were 
attracted to France, although under the influence of an entirely 
different set of circumstances. The French price level was 
relatively low in terms of gold after the stabilisation of the franc. 
This tended to stimulate the exports and to restrict the imports 
of commodities and to cause a surplus in the balance of current 
items in the international accounts. As a consequence, foreign 
balances, of which large amounts had been piled up during the 
so-called flight from the franc, grew rapidly. In the first half 
of 1929, the Bank of France exchanged a part of these foreign 
exchange reserves for gold. Later, when the Central Bank no 
longer deliberately pursued this policy, gold continued to flow 
in owing to the active balance of payments. 

The high rates on call money ruling in the United States, 
the fear that the stock-exchange boom there would end in a 
sudden crash and to some extent the strain on gold supplies, 
induced Central Banks elsewhere to raise their rates and restrict 
credit. 

C. The Turn. 

Just at this time, in the summer of 1929, construction 1 and 
production in manufacturing industries in many countries ceased 
to expand and in some contracted appreciably. The apex of the 
boom seemed to be have been reached and passed. The orders 
for machine tools had turned sharply downwards in the beginning 
of the year and orders for other important equipment goods 
had followed the same course in the spring. It is of course impos- 
sible to indicate a single month as that in which the turn actually 
took place. Certain series changed direction much earlier than 
others. It has already been mentioned that commodity prices 
started moving downwards in 1928. But the reduction was 
slight during the first half of 1929 and, in view of rapidly increasing 
productivity, it cannot be regarded as of great consequence for 
a judgment of the business cycle tendency in that period. The 
prices of important world staples moved in a very irregular fashion, 
some rising, others falling, and no marked change took place 
during the first nine months of the year, although the tendency 
of the index for the whole group of staples was slightly down- 
wards. It was only after the stock-exchange crash in October 
1929 that the slump in prices gathered speed. With regard to 
movement of share prices, it must be stressed that the experiences 



See Chapter V 



— 129 — 

of the New York Stock Exchange were exceptional. In most 
countries, the quotations of shares started to decline at the 
beginning of 1929, in Germany and Japan even earlier. The 
relatively pessimistic view taken by speculators outside the 
United States, would seem to indicate a foreboding that a 
change in the business situation was imminent. Money rates 
were, as already indicated, entirely under the influence of Ameri- 
can conditions. Only after the October crash did they turn 
decisively downwards ; but their decline in the following months 
was exceedingly rapid. The value of world trade also declined 
in the last quarter of 1929, but it is probable that the reduction 
in values was chiefly due to the drop in the prices of the commo- 
dities constituting that trade and only to a smaller extent to 
a contraction of the quantum. 

The change in the output of manufacturing industries in 
certain countries can be followed from the charts given in Section 
A. It will be seen that output fell off in Canada and in Poland 
in February 1929 and in Germany and the United States in June 
of that year. The maximum figure for Great Britain was 
reached in the last quarter of the year. In Japan, production 
seems to have remained on a fairly stable level during the 
whole of 1929 and perhaps even increased a little, in spite of 
the fact that demand had begun to fall off some time before. 
In France and Sweden, the decisive turn only came in the 
following year. There are reasons to believe that, in a consid- 
erable number of the other countries which publish no indices 
of output in manufacturing industries as a whole, the slackening 
in general activity began in the summer of 1929. 

A comparison of such figures for production and share prices 
leaves the impression that the extremely violent speculation 
and credit inflation in the United States delayed the break 
on the capita] market and the change in the psychological at- 
mosphere for a few months. It is significant that the wholesale 
price index in the United States moved upwards in the third 
quarter of the year, while com mod it y prices were, falling 
elsewhere. 

To what extent the changes in production and in general 
business conditions in the spring and summer of 1929 were due 
to the stringency in the credit conditions referred to in Section B 
above, it is impossible to judge. The general evolution of pro- 
duction and of demand had been such, however, as to render it 
probable that, even if there had been no speculation on the New 
York Slock Exchange, if international capital transactions had 
been other than they were and money conditions easier 

during 1929, some change iu business Conditions would have 
taken place al about I lie same lime as it aclually did. On the 



— 130 — 

other hand, it is also probable that the reversal of business 
trends would have been much less radical and violent. The general 
increase in money rates in the third quarter of the year could 
not but contribute to the restriction of business activity. 

After the break on the New York Stock Exchange, which 
decisively influenced other stock exchanges, commodity prices 
started to fall with great rapidity. Money rates were allowed 
to decline, but at this stage influenced but little the situation. 
Optimism gave way to a feeling of growing pessimism ; purchases 
were restricted and enterprise abandoned. 



Chapter V. 

A DESCRIPTION AND ANALYSIS OF THE 
DEPRESSION. 



Production. 



A. Production and Consumption. 



It is difficult to make any exact measurement of the effects 
of the depression upon the world's productive activity. Several 
methods of approach are possible. In this section three main 
sources of evidence will be discussed — indices of production, 
records of unemployment and statistics of stocks. 

The most comprehensive production index is the annual 
index of the production of foodstuffs and raw materials compiled 
by the League of Nations. 1 The general index for 1929 and 1930 
is as follows : 



Table I. — General Indices of Production, 
1929 and 1930. 



Continental group 


1925 ■- 


= 100 


1929 = 100 


1929 


1930 


1930 


North America 

Rest of World 


117 
105 
108 


113 

97 
110 


96 
93 

102 


World 


111 


107 


97 







1 C/. Mmtmrandam on Production anil Trade, 1925-1929/30 (Geneva 1931), 
Chapter II. The Indices for 1930 arc provisional. 



— 132 — 

In examining the above figures, it should be observed that 
about two-thirds of the commodities included in the index are 
of agricultural origin. The fact that the aggregate drop was not 
greater is indeed due to the maintenance of agricultural produc- 
tion in spite of the decline in prices. 

The variations in the output of agriculture may be seen 
from the following table showing indices of agricultural produc- 
tion - foodstuffs, raw materials and total. 1 

Table II. — Indices of Agricultural Production, 1929 and 1930. 

(Base 1925 = 100.) 





Foodstuffs 


Raw materials 


Total 


Continental groups 


19X9 


1930 


1929 


1930 


1929 


1930 


North America . . . 
Rest of World .... 


109 

94 

104 


110 

92 

108 


125 

100 
112 


111 

105 
112 


111 

99 
107 


110 

96 
110 


World 


101 


105 


111 


110 


105 


10G 



The supply of agricultural products in a given year depends 
both on the acreage under cultivation and on atmospheric condi- 
tions. In 1930, the changes in acreage, if any, were unimportant, 
and the weather was generally favourable. Thus the total 
agricultural production actually increased during the depression 
year. 

Bumper crops of foodstuffs were reaped in 1928. The aggre- 
gate crops of the following year were both below the average 
for the five preceding years and extremely unequal. The yields 
of 1930 were again abundant. The world harvest of wheat, in 
particular, exceeded that of the preceding year by 13 per cent 
and the beet sugar output was no less than 25 per cent greater. 
A considerable reduction was recorded only in the case of maize, 
cane sugar, coffee and hops. 

The relatively large output of agricultural raw materials in 
1929 was almost equalled in 1930. The total production of textile 
raw materials, which had increased less than any other group 
of industrial raw materials, rose. The output of vegetable-oil 



1 The foodstuffs index comprises food crops, colonial produce and hops, but 
not meat and dairy produce, for which comprehensive information is not available ; 
the raw-material "index includes textiles, tobacco, vegetable oil materials, and 
rubber. 



— 133 — 

materials would not have shown a drop, had it not been for the 
extraordinary variations in olive-oil production in the two 
years considered. This is the main reason for the low European 
index for 1930. Rubber production, again, was largely affected 
by the artificial control which eventually failed and led to a 
huge over-supply in 1929. The decline of 6 per cent in 1930 
was far from sufficient to re-establish the balance. 

The agricultural depression was considerably aggravated 
by the inequality of crops in the last years under review. The 
agricultural year 1929-30 opened with abnormally large stocks 
of cereals. In the following season, the cereal harvests reaped 
in North and Latin America and Oceania were relatively small, 
while the European crops were of record size. As the require- 
ments from overseas of the chief importing market consequently 
contracted, the major exporting countries found it difficult to 
market their whole supply. Accordingly, although the world 
harvests were reduced, a large surplus was carried over to the 
subsequent season. The world crops in 1930-31 were again 
large and again varied greatly in different parts of the world. 
The United States suffered from a serious drought. Soviet 
Russia, on the other hand, increased her food crops by 
approximately 20 per cent. A further disturbing factor thus 
arose — a sudden large increase in Russia's exports. 

The inelasticity of the supply of agricultural products rendered 
the market more and more unstable. Stocks rose, while the 
restriction of international credit transactions x made it more 
and more difficult to finance them. Prices declined rapidly. 
(See Chart 21.) 

The disturbances consequent upon the accumulation of 
large stocks of agricultural products and a simultaneous heavy 
drop in prices were particularly severe in the Argentine, Aus- 
tralia and Canada and in some other minor producing countries. 
The value of the Canadian crop in 1929-30 is estimated to have 
declined to 84 per cent of the 1928-29 figure, but this probably 
gives too favourable an impression of the actual situation ; a 
much greater drop must have taken place last year. In the United 
States, the value of the crop of 1929-30 has been estimated 
as 1 per cent greater than that of the preceding year, but the 
following year saw a drop of 29 per cent. 

The shift in agricultural production away from the bread 
cereals which had begun a little before the depression 2 did not 
advance much during 1930 and the first half of 1931. One factor 
which counteracted the tendencies making for adjustment was 



1 See Chapter V E, below. 
» See Chapter 11 A. 




134 



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— 135 — 

the increase in European food tariffs. 1 Further, in many countries, 
measures designed to increase the demand for home-grown 
grains were introduced. As a result the price of wheat in many 
European countries has remained at least as high as before the 
depression. The wheat acreage in Europe has not been contracted 
in spite of the fact that Europe has drawn much less advantage 
from the technical progress than other continents. The figures 
for the area under wheat in Europe (U.S.S.R. excluded) are 
given below : 2 



1928 


28.9 million hectares 


1929 


28.4 » » 


1930 


29.5 » » 


1931 


29.5 ■ » » 



In certain South-Eastern European exporting countries, a 
reduction took place, but it was offset by an increase in other 
countries protected by rising tariffs. The area under rye has 
been considerably contracted in most countries, partly because 
of the fact that only insignificant quantities enter into interna- 
tional trade and that therefore maintenance of prices through 
protective measures is relatively difficult; this rendered profitable 
a shift from rye to wheat cultivation. The reduction of the rye 
area in Europe is, however, small compared with the contraction 
of the wheat acreage in other continents. 

In the United States, the contraction has been relatively 
slight or from 24.9 million hectares in 1929 to 23.3 millions in 
1931. The Federal Farm Board and other organisations which 
were set up to administer the Agricultural Marketing Act in the 
summer of 1929 have carried on a price stabilisation policy 
which in the harvest year 1930-31 kept wheat prices in Chicago 
about 15 per cent above world prices. This influenced exports 
and, in spite of increased feeding to live-stock, the visible supply 
of wheat in the United States at the end of May 1931 was more 
than 50 million quintals as compared with 33 millions in May 
1930. The former figure is more than half of one year's pro- 
duction in that country. 

The Argentine, Canada and Australia, the very countries 
which have probably been able to reduce costs more than others 
through the technical progress which was described in Chapter II, 
have been forced by the low prices of cereals ruling on the world 
market considerably to reduce their area under wheat, as may 
be seen from the following table : 



1 See Tabic V. in Appendix and The Agricultural Situation in 
published by Lhe International Institute of Agriculture. 
1 International Institute of Agriculture. 



u>2!>-;u> 



— 136 — 

Table III. — Area under Wheat. 
Hectares (000,000's) 





1928 


1929 


1930 


1931 


Argentine . 


9.1 


6.4 


8.0 


7.2 


Australia . . 


6.0 


6.0 


7.3 


5.4 


Canada . . 


9.8 


10.2 


10.1 


9.3 



The Russian production of wheat, which rose before the 
depression, has continued to do so in the last two years. Favour- 
able weather conditions made the harvest in 1930 very large and 
the export of wheat from August 1930 to May 1931 amounted 
to 2.8 million tons. Although this represented a large increase 
compared with the previous year, it was only about 70 per cent 
of the normal pre-war export. 

The tendency towards increased output of animal food- 
stuffs seems to have continued almost everywhere during the 
depression. On the other hand, demand for these relatively 
expensive foods has probably been unfavourably affected. It 
is not surprising, therefore, that their prices, which were 
fairly well maintained in the beginning have declined rapidly 
since the autumn of 1930. Even by" I he end of thai year, 
however, their prices had not fallen from Lhe average of 1929 
more than the price of fodder, buL I hey dropped much more 
rapidly in 1931. Daily farming has thus become far less profit- 
able than a year ego. 

In view of these facts and the difficulty experienced by many 
fanners in raising the capital needed for an expansion of dairy' 
farming, it is not surprising that in many countries the increase 
in the production of animal foodstuffs has been slight. On the 
other hand, to judge from export returns, Australia, South 
Africa, New Zealand, the Irish Free State and Denmark, in 
which cereal prices have not been maintained at artificial 
levels, have increased their dairy farming to a large extent. 

Thus, the drop in prices both of vegetable and animal food- 
stuffs has not led to a reduced supply, rather the contrary. 

In striking contrast with the movement of agricultural 
production, the output of non-agricultural raw materials rose 
steeply in 1929 and fell heavily in 1930. a The world index 
of the output of non-agricultural products in 1930 was the lowest 
since 1926, the year of the British coal dispute. These raw 
materials, however, weigh less in the combined index than 
agricultural products. The index for the production of both 



1 International Institute of Agriculture. 

2 The index comprises fuels, metals, chemicals, cement and wood pulp. 



=- 137 — 

groups of commodities for 1930 is higher than that for 1927 
and only slightly below that for 1928. 1 



Table IV. — Indices of Raw Material Production, 1929 and 1930. 
(Base 1925 = 100.) 



Continental Groups 


Inorganic raw 
materials 


AH raw materials 




1929 


1930 


1920 


1930 


North America .... 
Rest of World .... 


133 
119 
129 


122 

98 

124 


131 
114 

116 


119 
100 
115 


World 


126 


111 


120 


110 



The reduction in world production of coal and lignite during 
1930 by 127 million tons or about 9 per cent was very striking. 
Output in the United States alone fell by 70 million tons and 
stood at a lower figure than in any year since 1922. The decrease 
was also considerable in Germany, the United Kingdom and 
Poland. Petroleum output was reduced less — by 11 million 
tons or 5 per cent — and remained higher than in any year 
before 1929. The reduction was mainly due to the application 
of the restriction scheme in the United States. Several other 
countries — namely, the U. S. S. R., Roumania, Venezuela and 
the Netherlands Indies — increased their output. 

In the metal group the greatest drop was recorded. The 
production of pig-iron was commonly accepted before the war 
as a rough index of general industrial activity. Its value for 
this purpose has decreased in recent years, but, together with 
the crude steel output, it reflects fairly well the variations in the 
heavy industries. The output of iron and steel in 1930 was 
reduced almost to the 1926 level. As compared with the record 
figures of 1929, the drop in iron output was about 18 million 
tons, or over 18 per cent, and that in steel output rather more — 
26 million tons, or almost 22 per cent. The drop was again 
more pronounced in North America than in the other important, 
industrial area. The contraction in pig-iron was slightly, and 
that in steel considerably, more than a quarter in America, 
but about a seventh only in Europe. 



1 (.'/. ChiipWT 1 — A. 



— 138 — 

The production of non-ferrous metals was affected in much 
the same way as that of iron and steel ; but the reduction was 
more moderate. Copper output fell by 18 per cent, that of tin 
by 9 per cent, that of lead by 7 per cent, and that of zinc by 6 
per cent. 

The restriction of the production of metals has been facilitated 
by the existence of national and international combines and 
cartels in these industries. The statistics show clearly that both 
the advance in 1929 and the drop in 1930 was greater in the 
countries belonging to the European Steel Entente than in other 
countries of Europe. The Tin Producers' Association was 
strengthened during 1930, and the Zinc Cartel, which was dis- 
solved at the end of 1929, was reconstituted in the middle of 
1931. On the other hand, the policy of control exercised by 
Copper Exporters, Incorporated, was abandoned in the begin- 
ning of 1930. 

Similar developments have taken place in the production 
of timber and wood pulp. It is difficult to gauge the aggregate 
effect of the depression upon the timber industry, as a consider- 
able drop in the output of countries of Northern Europe and 
Northern America — ranging from 13 per cent in Canada to 
26 per cent in Finland — was counterbalanced by a very large 
increase in the output of Russia. The contraction of production 
in Northern Europe was mainly due to the reappearance of Russia 
as a large timber exporter. The pulp industry, although not 
affected by Russian competition, was also obliged to cut down 
production on account of a decline in demand. In 1929, the 
syndicate of Finnish, Norwegian and Swedish producers of 
mechanical pulp had taken measures to curtail output, and in 
1930 the producers of sulphite pulp in Northern and Central 
Europe agreed to adopt a similar course. 

Drastic as the contraction of raw-material production was, 
consumption dwindled still more. Certain industries had accumu- 
lated stocks during the period of boom in 1928-29, but these 
stocks, although in many cases larger than in normal times, 
were generally small as compared with the total annual output. 
The changes in visible stocks during the depression will be seen 
from Chart 22. 

Stocks held by the producers appear on the whole to have 
increased rapidly. In the case of petroleum, however, this was 
not true. At the end of 1929, the stocks in the United States 
reached an unprecedented figure, equivalent to almost two- 
thirds of the total annual output of the country. In 1930, 
in spite of a rather moderate decrease in output, stocks with 
producers diminished ; but the volume of petroleum stored by 
the oil refineries increased. Thus, it would appear that in the 



— 139 — 

Chart 22. 
Stocks of Certain Mineral Products, 1929-1931. 



600 
500 
400 

J00 

200 










£TAtN 
Tiff 

€OPP£& 

P£Tf?W£tMt 








MQUtLLE 
COAL 












/ *» ! 


It* 




,,- 


I* 




. ^■:.'"".™ >i MU»»»?' 


r 






^^^ 


100 


jjJ^JJ^^'^" 


._*'" 














II 


I 


II 


I 


rwfinetf} 




1929 


1930 


1931 





first half of 1931, stocks of raw materials were still increasing, 
although on the whole at a somewhat slower rate. 

The drop in the production of manufactured goods can only 
be measured by means of national statistics. The national 
indices of production available generally cover mining, building 
and manufacturing industries ; they are comparable neither with 
the indices given above nor between themselves. 3 



1 July 1st, 1929, relatives ; lor lead, July 1st, 1930, relatives. 

Coal in Belgium, Germany, Upper Silesia, Saar ; petroleum in the U. S. A. ; 
copper, world excluding Japan ; lead in the U. S. A. ; tin, world. 

2 Sources : London and Cambridge Economic Service. 

Institut fur Konjunkturlorschung. 
:l C/. Memorandum on Production and Trade, 1925-1929/30, Ch. IV, and I he Sla- 
tistiral Year-Hook 0/ the I.eitijue of Nations, 1930-31, Tabic 91. 



Table V. 



— 140 — 

Quarterly Indices of Industrial Production, 1929-31. 
(Base 1929 = 100.) 













United 












Ger- 
many 


Poland 




Kingdom 


A 


Ca- 


U.S.A. 


Year and 
Quart er 


(a) 


Swe- 
den 


Board 


Lou- 
don 


to 


nada 
(b) 












of 
Trade 


and 
Cami). 


S3 






1929 I 


99 


93 


102 


103 


99 


98 


93 


106 


99 


II 


101 


107 


101 


100 


100 


100 


93 


102 


104 


III 


100 


101 


98 


97 


99 


98 


98 


97 


103 


IV 


103 


97 


98 


99 


102 


104 


116 


96 


92 


1930 I 


103 


92 


84 


110 


99 


99 


121 


90 


88 


II 


104 


88 


80 


102 


92 


91 


115 


91 


87 


III 


100 


78 


82 


93 


88 


82 


111 


82 


77 


IV 


97 


74 


82 


90 


88 


84 


144 


78 


71 


1931 I 


95 


68 


72 


88 


85 


77 


— 


76 


72 


II 


92 


73 


72 


81 


82 


73 


— ' 


*78 


74 



* Average for April and May. 

(a) Partly adjusted for seasonal variations. 

(b) Adjusted for seasonal variations. 



The chart in Chapter IV A and the table above give a 
general idea of the course and incidence of the industrial depres- 
sion. x In the first half of 1929, the general movement was 
erratic ; industry began to be generally affected in the second 
half-year. The recession continued in 1930, gathering force in 
the second half of the year. In the spring of 1931, as in that of 
1930, the downward trend of production was somewhat checked. 

This is a rough summary of world conditions : conditions in 
individual countries were very different. Thus in certain coun- 
tries industrial production had begun to stagnate before 1929. 
This was the case in Germany where, however, a temporary 
expansion took place from December 1928 to June 1929. 
The culminating point of industrial development in Poland had 
been reached and passed by the end of 1928. In Canada, the 
downward trend began in February 1929. On the other hand, 
the general upward movement of the British indices was 
still maintained in the last quarter of 1929, and the decline 



1 See Chart 15. 



— 141 — 



started only in the early months of 1930. In France, produc- 
tive activity advanced almost without interruption in 1929, 
and the level then reached was maintained throughout the 
first half of 1930. The production in Sweden was maintained 
during 1929, except for a seasonal contraction in the third 
quarter, and reached its highest point in the first quarter of 
1930. During the greater part of 1930, the downward trend of 
productive activity showed considerable uniformity. Far less 
uniformity was noticeable in the first half of 1931. The United 
States showed some signs of revival, in some countries there 
was little change and in others the recession continued. 

The physical volume of production dropped in practically 
all countries during 1930 ; much more in some than in others. 
The drop was greatest in the United States, Germany and Poland 
— the average volume of production in 1930 was nearly 20 per 
cent below that in the preceding year. In Canada, the decline 
in production began earlier than in the United States, but was 
not so pronounced — about 15 per cent between 1929 and 1930. 
Great Britain had advanced less rapidly than many other 
countries during the boom period, but withstood the strain 
better, the drop in her annual production in 1930 being only 
about 10 per cent. The total drop was very small in Sweden 
and nil in France. 

In the first half of 1931 these relative positions were altered. 
Productive activity in manufacturing industries in most countries 
concerned remained only slightly below the average level reached 
in the preceding half-year; but Great Britain and Sweden now 
suffered seriously. The net result was that in North America, 
Great Britain, Central European countries and Sweden the 
aggregate decrease of production from the average level of 
1929 was within the remarkably narrow range of 21-28 per cent. 

Indices of production, taken alone, do not fully reflect the 
violence of the crisis. This is shown more clearly by the records 
of unemployment. It had remained high in some countries, 
especially the United Kingdom, even during the period of general 
prosperity ; in others, such as Germany, it has been increasing 
since the beginning of 1928. But since the turn of the business 
cycle, unemployment has been growing rapidly in practically 
all countries. 

The aggregate number of the unemployed workers in the 
industrial countries of the world was estimated, at the end of 
1929, at some 10 millions ; it reached about 20 millions in the 
beginning of 1931. x The largest volume of unemployment at 



1 C/. Jnlcrnnlioniil Labour Ollice : "Unemployment Problems inlOSl" (Studies 
and KcpoilN, C:l(>), ]>]>. 12 et seij. 



— 142 — 

the latter date (January or February, 1931) was recorded in the 
following countries : 1 

Table VI. — Number of Unemployed in Certain Countries. 



United States . . 
Germany . . . . 
United Kingdom. 

Italy 

Poland 



6,000,000 2 

4,972,000 

2,697,000 

765,300 

345,300 



Austria . . . . 
Japan . . . . 
Czechoslovakia 
Belgium . . , 
Australia . . . 



331,200 
322,500 
239,600 
180,800. 
90,400 



Another index of the crisis in the labour market is provided 
by the proportion unemployed of the total of workers covered 
by the trade-union or insurance statistics. In June 1931, this 
proportion was especially high in the following countries : 

Table VII. — Unemployment Percentages in Certain Countries. 

Australia 4 26 

Poland 12 

Netherlands 13 

Sweden 3 13 



Germany 30 

Norway 25 

United Kingdom ... 16 

Canada 3 16 

Denmark 12 



The employment index of the U. S. Department of Labor 
for the manufacturing industries, based on 1926, was 99 in 
September 1929, but stood at 73 in January and at 72 in June 1931. 

Similar statistics are not published for all countries; but 
available information suggests that in many other countries 
the labour-market situation was equally depressed. 

The U. S. S. R. has reported a great expansion of industrial 
activity and a sharp decline in unemployment in 1930. 

Owing to the decline in real investment, the drop in the 
physical volume of production has been greatest in the heavy 
industries. 5 It has already been mentioned that the world 
output of iron and steel decreased by roughly a fifth in 1930 
as compared with the preceding year, and in the United States 
by more than a fourth. This heavy decline continued in the 
first half of 1931. Similarly, mechanical engineering was more 
depressed than manufacturing industries in general in 1930-31. 



1 The figures shown are not comparable : they are intended only to give a very 
rough indication of the magnitude of unemployment in the various countries. 

2 Unofficial estimate. 
s May. 

1 March. 

5 For further information concerning the position of individual industries see 
Memorandum on Production and Trade, 1925-1929 /30, Chapter IV. See also 
Charts in Chapter VI below and Table XI in Appendix. 



— 143 — 

In the United States, the demand for machine tools and foundry 
equipment was reduced by about one-half during 1930. On the 
other hand, the high level of production reached in France in 
1929 was maintained in the subsequent year, and only dropped in 
the first half of 1931. 

The contraction in international trade and the low freight 
rates have severely affected shipbuilding. Owing to flow of orders 
received in 1929, shipyards were relatively busy during the 
first part of 1930 and total tonnage launched increased in that 
year as may be seen from the following table. But the tonnage 
under construction in the world fell from some 3,000,000 tons in 
December 1929 to 1,825,000 tons in June 1931. The United 
Kingdom and Germany have suffered most severely. The demand 
of the United States and other countries has been diverted to 
domestic shipyards. 



Table VIII. — Tonnage launched annually. 1 

Vessels of 100 tons and upwards, 
(tons measurements, 000's omitted). 

1911-1913 2,962 1928 

1919-1921 5,788 1929 

1925-1927 2,031 1930 



2,674 
2,759 
2,889 



The position of the motor industry is peculiar, inasmuch as 
five-sixths of all motor vehicles are produced in North America, 
where it is the greatest single industry. The total output in the 
United States and Canada decreased in 1930 by 38 per cent ; 
the upward trend noticeable in the beginning of 1931 was of 
a seasonal character. On the other hand, the two chief European 
producers of motor vehicles, France and the United Kingdom, 
suffered comparatively little in 1930. Rubber manufacture is 
closely connected with the motor-car industry ; in fact, nearly 
85 per cent of all raw rubber is said to be used in the manufacture 
of tyres and tubes. The set-back in the rubber industry in 1930 
was, however, not so serious : the French and British industries 
actually increased their output. 

In striking contrast to the heavy industries, the production 
of electrical energy and electrical engineering appear to have 
been but little affected by the depression, although the long 
upward trend in these industries has been checked. The exports 
of electrical apparatus from most European countries actually 
increased in 1930. Those from the United States were almost 



'Since 1911) not including Russia. 



.— 144 -^ 

maintained : orders, however, decreased rapidly towards the 
end of the year. Long before the general industrial crisis 
conditions in the textile industry had been depressed. The level 
of activity in these industries in 1929 had been low m comparison 
with other industries, and by 1930 their activity had fallen 
near or below the level of 1925. Cotton has suffered more than 
other brandies or the textile industry ; the nnll consumption 
of raw cotton diminished, between the half-year ending January 
1930 and the corresponding period in 1930-31, by 17 per cent. 
Activity in the cotton-spinning industry in Germany declined 
in 1929 ■ in 1930 it fell off by 24 per cent in the United States ; 
bv 28 per cent in the United Kingdom ; in France, by 7 per 
cent ; it was the only important branch of the Rus sian mdust na 1 
activity in which no advance was recorded. Meanwhile India 
registered an increase of 18 per cent. The woollen and worsted 
trade on the whole resisted the depression much better. A 
considerable reduction in activity - 29 per cent - was ; never- 
theless recorded in the United States. The activity of the s Ik 
and artificial silk industries m general declined rathtr little 
during 1929-30. The largest national silk industry in the world, 
that of the United States, showed a drop of only 7 per cent, 
and an upward trend was noticeable m the wmterol IgKg* 
On the other hand, the French silk industry has declined sharply 
since 1928, the total drop in production during the two subsequent 
years being about 33 per cent. The artificial silk mdustiy, 
Iga£, maintained its position fairly well world P^ucbon 
decreasing by only 2 per cent between 1929 and 1930. The 
general level of activity in the textile industries was never- 
theless rather low by the end of 1930, but showed signs of 
stabilisation during the first half of 1931. 

With the textile trades, the leather and boot and shoe indus- 
tries were among the first to be seriously affected by thejpneral 
industrial depression. Activity in ^ e „^ d ™J*f J"g ^ h Z 
declining in Germany and Sweden since 1927, and in most other 
countries the busiest year was 1928. Except in France however, 
the depression has not been as severe as m the case o ^textiles. 
In Great Britain and the U. S. S. R. the indices for this group 

r ° S In n the 3 food and drink, paper and printing industries activity 
appears to have remained relatively stable throughout Hit 

d Tariatlons in productive activity are closely related to changes 
in stocks. After the outbreak of the crisis, manufacturers and 



x The differences in the development of industries producing consumers- 
and producers' goads will be discussed in Chapter VI— D below. 



— 145 — 

merchants restricted their purchases of raw materials which 
tended to fall in price ; thns, while stocks of raw materials held 
by the producers, as shown above, have increased during the 
whole period of depression, it is probable that stocks in the hands 
of manufacturers have declined. Unfortunately, practically no 
data are available to throw light on this question. The case is 
very much the same with regard to stocks of manufactured 
commodities. There is reason for believing that wholesale 
merchants have been carrying as small stocks of manufactured 
goods as possible and have bought " from hand to mouth ". 
Manufacturers, however, were unwilling to produce for stock. 
The stocks of manufactured goods held by manufacturers probably 
increased a little in the earlier stages of the depression, but there 
is no evidence that they have continued to grow. On the whole, 
visible stocks of manufactured goods seem to vary less than 
those of raw materials. This is the impression obtained from the 
following indices of stocks for the United States (monthly 
average 1923-1925 = 100) : 

Table IX. — Commodity \S locks in the United States. 

June Dec. June Dec. 
1929 1929 1930 1930 

Raw materials ... 120 186 125 195 

Manufactured goods . 121 119 125 121 



There are of course marked differences in the movement of 
stocks of different kinds of commodities. The statistics available for 
the United States as well as Germany go to show that the stocks 
of producers' goods have tended to increase during the depres- 
sion, while those of finished consumption goods have decreased. 

In the retail trade a reduction of inventories has also taken 
place, but it seems to have been relatively small. The figures 
for the value of stocks have declined not more than the prices 
of manufactured commodities. However, as the stocks are 
usually kept in the books at the prices at which they were bought, 
the average book-keeping price has declined much more slowly 
than the purchase price. Hence, it is probable that the volume 
lias declined a little. In the table below are given certain figures 
for the United Kingdom and the United States. Whatever 
information is available concerning the purchases and sales of 
department stores points in the same direction, as it indicates 
that the former have been restricted more than the latter and 
that, consequently some reduction of stocks has taken place. 
Nnlhing suggests, however, that any considerable decline has 
taken place, although it is possible that the reduction has been 
greater in shops of :> different character. 

in 



146 — 



Table X. — Movement of Retail Stocks. * 






Percentage change 




from 192a 
to 1930 


from 1930 
to 1931 


United Kingdom 

Department stores ........ 

Department stores 1 

Co-operative stores } 

Multiple stores 

United States 

Department stores 


-5.7 * 
-3.4 


-6.8 B 
-11. 3 



The absence of reliable information concerning the variations 
in stocks of commodities is one of the greatest obstacles to a 
scientific analysis of the depression. 

The preceding review of the extent and nature of the depres- 
sion from the end of 1929 to the middle of 1931 shows that the 
balance of the industrial system has been seriously disturbed. 
Raw-material production decreased by about one-tenth and the 
industrial production perhaps by one-quarter. Unemployment 
was doubled ; in the leading industrial countries it affected from 
about one-sixth to one-fourth of the entire labour force, and the 
total number out of work grew to little less than the astounding 
figure of 20 millions. Yet it should not be forgotten that the 
aggregate wealth of the world was, at the outbreak of the crisis, 
higher than ever before. Thus the level of production and the 
aggregate national income in terms of goods and services in most 
countries are even now higher than only a few years ago. 

Building Activity. 

For some years after the war the scarcity of capital and the 
rent restriction enforced in many countries exercised a depressing 
influence on the activity in the building industry. But with the 
economic reconstruction of Europe and the rapid economic 
development in other countries, a strong demand for new buil- 
dings began to make itself felt. From 1922 onwards, construc- 
tional activity increased rapidly in the United States, from 



* Sources : United Kingdom, Board of Trade Journal. 
United States, Survey of Current Business. 

1 August-December. 

2 February-June. 

3 January-May. 



— 147 — 

1923 in Canada, and in the following years a similar, although 
less pronounced, movement made itself felt elsewhere. In 
Germany, the total value of new constructions in 1924 was 
smaller than the estimated depreciation of existing buildings. 
In 1927, however, the value of new constructions was 2% 
times as great as this estimated depreciation. 

By 1928, the building trade, was well occupied in most coun- 
tries and showed a strong tendency to expand ; in many coun- 
tries, indeed, building activity was greater than ever previously 
recorded. The only important exception was Great Britain, 
where the number of houses finished showed a small decline in 
1928. The number of building permits, however, was slightly 
larger than in the preceding year. 

It is a well-known phenomenon of pre-war economic history 
that, during the latter part of pre-war boom periods, capital 
was diverted from building construction to other forms of 
investment. In such periods, the falling prices of mortgage 
bonds and the rising prices of shares made it difficult to secure 
adequate supplies of capital for building at a profitable rate 
of interest. In 1929 in some countries — in particular the United 
States — such a decline in the construction of residential build- 
ings was noticeable. In the United States, however, the 
volume of construction had been exceptionally large for no less 
than six years, and in 1928 and 1929 the level of rents declined 
considerably relative to building costs. 

Chart 23. 
Building Costs and House Rent in the United States. * 

5ii/v.fSi.i*{ m ' 




* Source : Virrlrljulirslirftc zur Kou/iiiilcliir/orsclumt/. 
' Index of I lie New York I'Vdci'nl Deserve ll:mli. 
' Inilrs ill' I lie National Industrial Conference Board. 






— 148 — 

In. most countries, on the other hand, construction kept up 
well during 1929. This was the case in Austria, Belgium, the 
Netherlands, the United Kingdom, Italy and Sweden, as shown 
by the following unemployment figures. It was also true of 
France, Switzerland, Denmark and Poland, and, although less, 
of Canada and Germany. 

Table XL — Unemployment in the Building Trade. 



June 


Percentage of trade 


unionists unemployed 


Numbers ot trade 

unionists un- 
employed (000's) 




Belgium 


Canada 


Ger- 
many 


Net her- 
lands 


Unit ed 
Kingdom 


Sweden 


Auslria 1 


Italy 8 


1927 


1.8 


8.0 


5.3 


8.5 


6.9 


4.7 


12 


43 


1928 . 


0.4 


3.9 


8.0 


7.0 


9.7 


2.4 


8 


62 


1929 . 


0.1 


7.5 


10.4 


2.1 


8.6 


1.5 


17 


39 


1930 . 


2.7 


26.2 


38.0 


6.2 


13. I 1 


4.2 


28 


71 


1931 . 


11.5 


— 


56.6 


— 


18.6 


— 





164 



In Czechoslovakia, the number of rooms finished dropped 
by 25 per cent in 1929. This fall was, however, largely due to 
the discontinuation from the beginning of that year of tax 
exemption for new houses. Of other countries for which material 
is available only Finland recorded a serious decline in building 
activity in that year. In this country a very pronounced building 
boom came to an end in the previous year as a result of the 
tightening of the money market and the consequent sudden 
restriction of credit for the building trade. 

In 1930, divergent tendencies made themselves felt. In a 
number of countries, and in particular some non-European 
countries which depend on foreign investments, building appears 
to have been suddenly checked. In other borrowing countries, 
the reduction of capital imports and perhaps also the reduc- 
tion in domestic savings seriously affected constructional acti- 
vity. (See Chart 24.) 

The rapidity of the contraction in the German building trade, 
as shown in Table XI, was largely due to reductions in public 
expenditure. No less than 80 per cent of the building in 1929 



1 In February 1930 a change in the system of recording unemployment took 
place. 

2 Compulsorily insured. 

3 Unemployed registered. 



— 149 - 



Chart 24. 

Building Activity. 1 
(1928 = 100.) 




lie?, 



wo 



10./ 



■IS 



*■ - • ■ M 



1 Canada, US. A.: contracts awarded; United Kingdom, Belgium: building 
IMTinils ; (in-many : buildings commenced. 



— 150 ~ 

was on account of public authorities or subsidised out of public 
funds. 

On the other hand, activity was well maintained in certain 
capital-exporting countries — France, Belgium, Switzerland, 
Sweden, Netherlands, Czechoslovakia and the United Kingdom. 
This was one result of the increase in the proportion of capital 
used by capital-exporting countries for investment at home, to 
which reference is made elsewhere in this report. In Denmark, 
where the depression was relatively little felt, building activity 
continued to expand in 1930. 

Little information regarding the year 1931 is at present 
available, but from figures for building permits in certain coun- 
tries it is clear that the decline in building activity is spreading 
(see Chapter VIII). 

Consumption. 

Statistics and other sources of material which throw light 
on the changes in demand and consumption are exceedingly 
scarce. Figures for world production probably provide the 
best basis for an opinion regarding the variations in world 
consumption. It is true, however, that in many cases stocks 
have varied considerably from one year to another, and the 
magnitude of such stocks is never completely known. The 
analysis made in the preceding section of the restriction 
of output and the increase in stocks since the beginning of the 
depression nevertheless serves well to indicate the recent 
changes in world consumption. The present section will be 
concerned more especially with changes in certain individual 
countries which can be observed from figures of domestic and 
international trade, receipts from indirect taxation, etc. 

Consumption has naturally been affected very differently 
from one country to another, just as within individual countries 
the various groups have suffered in different degrees. As might 
be expected, the industrial countries record a far smaller con- 
traction than those whose economy is largely dependent on the 
export of cereals or other crude products which have fallen 
heavily in price. The extent of the contraction has again in part 
depended on the social and economic organisation of the countries 
concerned, and in part on the length of time during which con- 
ditions have been depressed. 

Returns of the production and stocks of foodstuffs have 
shown that the world's food consumption has been well main- 
tained in spite of the impoverishment caused by the depression. 
Other sources of evidence — e.g., from the retail trade — ■ amply 
show that, in European countries at all events, food consumption 



— 151 — 

has been but little affected. The depression has in many countries 
led to less serious physical want than might have been anti- 
cipated, although in the last few months conditions appear to 
have been aggravated in many countries. Wage indices have 
almost everywhere fallen less rapidly than the cost-of-living 
indices, and State relief or insurance benefits have done much 
to maintain the consumption of the unemployed. 

Even where incomes have fallen, however, consumption 
of all but the very poorest classes has on the whole been well 
maintained, owing to the rigidity of personal habits. It would 
seem that the habit of eating meat and wheat, bread acquired 
in the past ten years in many parts of Central and Eastern Europe 
is resisting the recent changes. Thus, although the fall in the 
retail price of meat, eggs and fats has been relatively small 
during 1930, the consumption of these commodities was main- 
tained in Germany, Hungary and other European countries 
which have been not the least affected by the depression. Indeed, 
so far as foodstuffs are concerned, it would appear that the 
upward trend of demand for animal foods, vegetables, fruit, etc., 
noticeable before the depression, continued to assert itself, 
although less strongly than before. This phenomenon has of 
course been partly due to the fall in prices. 

The maintenance of consumption is of course in part the 
result of the inability of the peasant to sell his produce 
except at prices greatly lower than he had anticipated. Its 
value to him as a consumer came to exceed its exchange value. 

In Germany, the consumption of fish, eggs, groceries, sugar, 
coffee, tea and exotic fruits was greater in 1930 than in 1929, 
but for certain of these articles the figures for the first quarter 
of 1931 showed signs of decline. In Belgium, the rapid expansion 
in imports of exotic fruits was arrested, but the figures were 
higher than for any year except 1929. The yield of the various 
taxes on consumption in France was 6 per cent below the 1929 
figure, 1 but the latest monthly figures show no pronounced 
downward trend. In Austria, more exotic fruits, more wine, 
more sugar were being consumed per capita in 1930 than in the 
previous year. 

The consumption of beer, wines, spirits and tobacco has, 
in 1931, been very considerably reduced. In Germany, the 
consumption of cigarettes was lower in the first quarter of 
1931 by 46 per cent and that of cigars 49 per cent than 
in the corresponding period of 1930. The reduction in 
the United States was 9 per cent for cigars for the period 






1 Indices du mouvement des affaires. Institut de Stalistique de l'UniversiUS dc 
Puns. 



— 152 — 

January-May in these years. Consumption of tobacco in Italy 
in the first five months of 1931 was 11 per cent less than in the 
corresponding period of 1930. It is uncertain, however, to what 
extent this has been due to reduced purchasing power. Taxes 
on such goods have been increased in many countries, and the 
consequent increase in the price paid by the consumer has natu- 
rally reduced demand. In Sweden and the Netherlands the 
consumption of tobacco actually increased by 7-8 per cent 
between 1929 and 1930. 

The countries mentioned above are chiefly those with a large 
manufacturing industry, which have suffered less than many 
others from the depression. The situation has been somewhat 
different for countries largely dependent on the production and 
export of primary products, although, even in their case, the 
decline in consumption has been mainly confined to goods other 
than foodstuffs. Some countries, however, whose economy is 
dependent upon a single raw material or upon a small number 
of them, have been so much affected by the depression that even 
their consumption of food has been radically cut down. The 
Gold Coast may be selected as an example. 

Table XII. — [Percentage Reduction of Imports into the Gold Coast. 
(From the first quarter of 1930 to the first quarter of 1931). 

Canned fish 66 Milk 28 

Rice 58 Gin . . . 98 

Flour 64 Sugar 60 

Salt beef ....... 42 Tobacco 69 

Canned beef 94 Cigarettes 74 

One obvious reason why the demand for foodstuffs has kept 
up so well lies in the constitution of the human body. Wc are 
able to postpone for a longer or shorter time our demand for 
almost everything except food. Further, foodstuffs are con- 
sumed once and for all when they are eaten. Textiles, clothing, 
shoes and similar commodities are naturally more durable, but 
less so than, for instance, furniture, household utensils, motor- 
cars, radios and gramophones. The first group of commodities 
satisfies less insistent needs than foodstuffs, but needs which are 
usually regarded as ranking higher in the scale of needs than 
the latter group. Hence, for two reasons demand for the latter 
class of durable goods might be expected to decline more during 
periods of bad business than that for the former. 

A study of the scanty material available for retail trade 
suggests that this has actually happened. The chief conclusion 






— 153 — 

to be drawn from this material is, however, that total sales have 
kept up very well in retail trade as a whole. Some information 
concerning conditions in Germany, the United Kingdom and 
the United States is given in the table below. 

Table XIII. — Percentage Change in Value of Retail Sales. 1 





From 
1929 to 1930 


From 
1930 to 1931 


Germany : 

Co-operative stores. . 
Department stores . . 


+ 2.9 

+ 6.3 


— 3.3 (Jan.-March) 

— 13.0 (Jam-April) 


United Kindom : 






Department stores . . 
Co-operative stores | 
Multiple stores and \ . 
Department stores J 


— 3.7 2 


— 4.2 (Feb. -June) 


United States : 






Department stores . . 
Mail order houses . . 
Ten cent chain stores. 


— 7.3 


— 5.5 3 (Jan.-May) 

— 12.2 3 (Jan.-May) 

— 0.6 3 (Jan.-May) 



The reduction is remarkably small in view of the fact that 
retail prices have of course also dropped. Indeed it is doubtful 
whether the volume of retail trade has declined at all in the 
United Kingdom. For clothing the drop in prices would 
seem to have been substantially greater than that in the value 
of sales ; the volume sold would therefore have actually increased. 
Even in Germany the reduction has probably been small. In 
the first half of 1931, the value of total retail sales was 
16.7 per cent lower than in the same period of 1929. For 
foodstuffs the decline was 13.4 per cent, but this was 2 per cent 
less than the drop in the prices. The retail prices of textile 
goods were 17.4 per cent lower, whereas the value of sales of 
such goods had declined 20.5 per cent. Thus the volume sold 
seems to have dropped about 3 per cent. A study of price 



I Sources : Germany, V ierleljahreshefte zur Konjunktursforschung . 

United Kingdom, Board of Trade Journal. 
United Slates, Survey of Current Business. 
- August-December. 

II Drop from Gori'Gspcmding period in 1929: 9, 12.3 and 3 perron I res eclively. 



— 154 — 

figures for individual commodities in the United States leads 
up to very much the same conclusion for that country. 

In the boot-and-shoe trade there has been a definite reduction 
in sales, and it is probable that for this the decline in prices has 
been only partly responsible. Owing to the unsatisfactory 
character of the price material it is, however, impossible to 
indicate the exact magnitude of the decline in the volume of 
sales. Furniture sales have also dropped more than sales of 
most commodities. For instance, in the United States in the 
second half of 1930 the value of sales was nearly 30 per cent lower 
than in the same period of 1929. In Belgium in the first five 
months of 1931, sales of furniture were as much as 31 per cent 
less than in the same period of 1930. Even in this branch, 
however, sales in the United Kingdom declined very little. 
From the period February to June 1930 to the same period 
in 1931, the reported reduction in the value of sales was only 
1 per cent, which indicates an actual increase in the quantity 
sold. Sales of hardware and fancy goods have also declined 
but little in that country. It is worth observing, however, 
that the local differences are enormous, the northern part of 
the country showing much less favourable figures than southern 
England. 

In the United States, jewellery sales declined a great deal. 
In the first half of 1930 they were 20 per cent lower than in 
the same period of 1929. The corresponding figure for the 
second half of the year was 24 per cent. Here again considerable 
price reductions make it uncertain how the volume of sales 
has varied. On the other hand, the sales of electrical appliances, 
which had shown a rising trend before the depression, slightly 
increased even afterwards. 

The general impression obtained from these and other figures 
is that the volume of retail trade has changed very little except 
for a few durable commodities such as furniture and possibly 
shoes. Certainly in such a country as Sweden there has been 
an increase in almost all classes of sales in 1930. But in the 
first quarter of 1931 there was a substantial decline. But the 
position of that country was relatively favourable and not 
typical of conditions elsewhere. 

"When considering the decline in consumers' purchases of 
durable goods, it should be remembered that a drop in the demand 
for less durable goods such as foodstuffs, textiles, boots and 
shoes, etc., represents a real contraction in consumption. 
On the other hand, even a substantial fall in the number of 
cars, wireless sets or gramophones purchased represents mainly 
a decline in the number of new consumers of these goods and 
may mean a very slight contraction in consumption. 









\ 



— 155 — 

It is natural that, with a contraction of income, economy 
is normally first effected by not purchasing articles which are 
expensive and not strictly necessary, and by postponing the 
replacement of such articles as can most easily be made to last 
a little longer. Thus the drop in the demand for luxury articles 
and for durable goods such as furniture, motor-cars, gramophones, 
household utensils and appliances has been relatively great. 
It would appear that the purchases of durable goods have 
declined more heavily in the United States than elsewhere — 
e.g., the sales of motor-cars declined by 29 per cent in 1930. 
The corresponding reductions in the United Kingdom and 
Italy were 12 per cent and 13 per cent respectively. In France 
an increase of 9 per cent took place. For this at least two 
main reasons may be adduced. The instalment system and 
the practice of using profits from speculation for purposes of 
consumption, which had inflated demand in the years preceding 
the depression, have since had the effect of aggravating the 
contraction in demand. 

Statistics of the production of wireless sets are not available, 
but it is known that the industry was quickly and severely 
depressed in the United States. 

Among countries producing large quantities of foodstuffs 
and raw materials whose demand for manufactured durable 
goods has declined considerably, Poland may be mentioned as 
an example. Imports of clocks and watches were, in 1930, 
37 per cent lower " than in the preceding year. Imports of 
musical instruments fell by nearly 17 per cent, books, periodicals, 
etc., by over 15 per cent, and ready-made clothing by 25 per 
cent. In Hungary, sales of household utensils, which in 1929 
were only 63 per cent of the 1927 figure, fell by a further 25 per 
cent in 1930 and were still declining in the early months of 
1931. The value of imports of musical instruments into 
Australia which amounted lo £218,000 in the second half of 
1929 had dropped lo £48,000 one year later, and for such 
articles as jewellery, watches and clocks, stationery, household 
furnishings, etc., there was a huge decline. This can only 
partly be explained by reference to the increased impedi- 
ments to importation. Cinematograph films are one of the 
very few products for which an increase in imports was 
recorded. 

The changes in consumption discussed above are of course 
not equivalent to changes in demand. A drop in price may 
bring about increased consumption even if demand is no more 
intensive than before. Similarly, the consumption of certain 
commodities may be maintained at the expense of severe price 
reductions, while I lie consumption of oilier connnodilies wliose 



— 156 — 

prices are kept relatively stable may decline to a much greater 
extent. This consideration is of the utmost importance, especially 
in the case of commodities for which demand is relatively elastic. 
It is not so important in the case of foodstuffs for which demand 
is usually relatively inelastic. Even here, however, in cases 
where finer and more expensive qualities may be substituted 
for a cheaper and lower grade or vice versa, demand may be 
rather sensitive to price changes. For instance, the increase 
in the consumption of butter must be largely due to the fact 
that the drop in its price has made some people reduce their 
consumption of margarine. It may also be due to the fact 
that people are used to spending a certain part of their income 
on food. Hence, a reduction of the food prices in general will 
tend to make people whose incomes have remained relatively 
stable turn to higher and more expensive qualities. 

House rent represents an important part of the consumer's 
budget. There is little evidence that the amount spent on 
this account has been reduced. There has nowhere been any 
considerable increase in the number of empty flats and houses, 
and the decline in rents has only been appreciable in a few 
countries. 



B. Prices, Wages and Profits. 

The rapid fall in prices is one of the most important mani- 
festations of the economic crisis and at the same time one of its 
most significant causes. A sudden decline in commodity prices, 
unrelated to changes in methods or costs of pro due lion, involves 
a reduction or the entire elimination of profits : business enter- 
prises are closed down or work only on part time ; new investment 
is discouraged ; men are thrown out of employment ; the demand 
for commodities is reduced and prices fall still further. A fall 
in the price of commodities begets a belief in further falls ; 
prospective buyers withhold their purchases and thus add to the 
forces tending to depress prices. 

A fall in the general level of prices has, in addition, a profound 
influence on the distribution of income and thus an indirect as 
well as direct effect on production. There are, in every country, 
certain classes whose money income is fixed by statute or 
contract ; when prices fall, these classes receive a larger share of 
the national dividend — that is, with the same amount of money 
they are able to purchase more goods and services at the lower 
prices prevailing. A smaller share is left for those whose income 
is not fixed and, where wages and salaries are rigid, profits have 
to bear the brunt of the reduction. For these and other reasons 



— 157 — 



investment is discouraged. The effects of falling prices differ, of 
course, from industry to industry and from country to country. 
Countries and industries where fixed charges, such as interest 
on public debt and overhead expenses, constitute a large propor- 
tion of total expenditure find themselves at a disadvantage 
compared with those in which a larger proportion of costs are 
variable. Where a large share of a country's national debt is 
held abroad, a fail in prices operates even more strongly to its 
disadvantage. Countries and industries with inflexible wage 
systems find difficulty in competing with those in which wages 
are more flexible ; in those in which productivity is increasing, 
part of the effects of a general fall in the price level is offset by 
automatic reductions in cost per unit of output. 

It has been shown in Chapter II D, above that, even before the 
rapid decline in prices began, there were certain elements of 
instability in the price situation of different groups of commo- 
dities. In particular, stress was laid on the fact that, in many 
parts of the world, the prices of manufactured goods had risen 
more since 1913 than those of raw materials ; it can now be seen 
that the consequent weakness in the financial position of certain 
classes of primary producers and the excessive productive capacity 
in manufacturing industry are among the factors which have 
intensified the severity of the present depression. In spite of the 
relatively low prices of many agricultural products, total pro- 
duction of this group of commodities (as shown in Chapter II A. 
above) was also greatly extended. The production of the period 
1922-1929 in the case of several vegetable foodstuffs tended to 
outrun demand. As a result, the general trend of the prices of 
these commodities was downwards, in spite of several official 
and non-official attempts to restrict sales. 

With the crash of the New York stock market in 1929, a 
gradual price recession gave place to a large scale liquidation. 
The demand for new investment in all parts of the world was 
diminished. Consumers' demand was also to some extent 
restricted. Enterprises which had just succeeded in keeping 
going during the upward swing were now liquidated. Stocks 
could no longer be financed ; consequently, large quantities were 
thrown on the market at a time when the demand for these 
goods was restricted — the inevitable result was a rapid decline 
in prices. Countries producing commodities such as coffee, 
sugar and certain cereals for which there was a tendency towards 
over-production suffered first and most severely. But the 
decline in prices soon spread to practically all world staples 
not under effective control — this meant that the general level 
of prices in all countries moved downwards. 

The following diagram (Chart 25) shows the percentage decline 



158 



Chart 25. 

Percentage Fall in Wholesale Prices between 1928 > 
and June 1931. 2 



BQ/TAHMQl/e - SStrjSH J/rsui 



z :::::. •.."■ I 



rO£/GQS£AYf£ - r&SGSiAWA 



31/LGA&/F -&UL GAG/A 



/r^L/j^-/rA£.y 



mm 



£TAF5-t&ftS &'AM. MSA. 



GGWVMZ -6W/ - &WRS& /&#&£&& 



...... 



$(/£&£- SWFD£/V 



MlE^WF-G&Qt&Wy 



Aor/?/ctf£ - Ausr&/A 






,vVc - Ji.-/JftfW 



20 22 21 26 26 50 32 



Average of the year 1928. 
: Average of June 1931. 



— 159 



that has taken place in the general level of wholesale prices in 
certain countries between 1928 and the middle of 1931. The 
unshaded part of the bar for each country represents the decline 
up to June 1930 and the complete bar the total decline up to June 
1931. The indices for the various countries are constructed on 
different principles ; no general conclusions can therefore be 
drawn with regard to the relative severity of the fall in prices, 
even in countries with similar economic structures. For example, 
the index for Germany includes some fully manufactured pro- 
ducts, which tend to fall less in price during a depression, while 
that for the United Kingdom includes only crude foodstuffs 
and industrial raw materials and semi-manufactured goods which 
tend to fall more. 

The price indices that are heavily weighted with raw materials 
and crude foodstuffs have fallen more than those which include 
a large proportion of finished products. Within each country, 
as will be shown in some detail later, the prices of different 
groups of commodities have moved in different ways ; in Canada, 
for instance, where the general price decline was 25 per cent 
between 1928 and June 1931, raw and partly manufactured 
goods fell by almost 40 per cent (Canadian farm products by 
over 40 per cent) and fully and chiefly manufactured goods by 
slightly more than 20 per cent. In most agricultural countries, 
the general level of wholesale prices at the middle of 1931 was 
below the pre-war leveJ ; in the majority of the highly indu: a- 
lised States, it was stilt some 10 per cent above that figure. 

To appreciate the true significance of the price decline, it is 
necessary to examine, not only the general level of wholesale 
prices but also the prices of particular commodities and groups 
of commodities on various markets ; marked inequalities in 
price movements indicate changes in the economic relationships 
between various groups of producers and various countries which 
are of primary importance in an analysis of the depression. 

It may be convenient to set out first the changes which have 
taken place in the world market prices of certain important 
commodities. In the graph which follows (Chart 26), the percen- 
tage decline in the prices of a score of such commodities is 
shown. The unshaded part of the bar for each commodity 
represents the percentage decline in the first period of the 
depression (1928 to June 1930), while this and the shaded part 
together represent the decline from 1928 to June 1931. 

In cases where some recovery had taken place by June 1931 
the bar is extended to show the lowest point reached. The month 
in which I he price touched bottom is also indicaled. 

On world markets, I he greatest decline has taken place in 
the price of organic materials, the supply of which can least 



160 



Chart 26. 

Percentage Decline in Prices of Certain Foodstuffs and Raw 
Materials on World Markets between 1928 * and June 1931. 2 







1 Averate of the year 1928. 

2 Average of June 1931. 




— 161 — 

easily be regulated. Practically all these goods are non-European 
staples — ■ crude vegetable foodstuffs on the one hand and 
textile raw materials on the other. Both rye and wheat stood 
about 60 per cent below their 1928 level in the middle of 1931 
and certain important colonial products fell to the same extent. 
Of these colonial products, coffee dropped most in price in the 
first few months of the recession ; when the speculation boom 
came to an end in the United States in the autumn of 1929, 
the Brazilian producers were no longer able to secure funds 
with which to finance their stocks and had to throw them on 
the world market — in three months the price of coffee fell 
by 33 per cent. Of the important cereals, only maize fell quickly 
in price ; that of wheat had declined by only 8 per cent by the 
end of 1929. In spite of the favourable harvest in the importing 
countries in 1929, the world crop of wheat in that year was 
poor and the Federal Farm Board and Canadian wheat pool 
succeeded for a time in maintaining prices. During 1930, 
however, the decline continued steadily and was very marked 
during the first half of 1931. 

Had it not been for other factors, it might perhaps have 
been expected that, on account of the inelastic demand for 
crude foodstuffs, the prices of this group would not be greatly 
affected by an industrial depression. When in the past severe 
depression coincided with short crops, as in 1908, the price of 
the latter rose in spite of the general decline. When the present 
industrial depression came, however, the stocks of wheat and 
coffee were already growing excessive, and the inability to finance 
them, combined with the inelasticity of supply, was sufficient 
to cause great fluctuations in price in spite of a relatively small 
change in consumers' demand. 

Animal foodstuffs have fallen considerably less in price than 
vegetable foodstuffs, although in the second year of the depression 
price declines in meats have been more frequent and more serious. 
For the greater fall in 1930-31 the mild winter of 1929-30 may 
be held partly responsible ; further, the very low prices of fodder 
required for stock-raising and the low prices of cereals stimulated 
meat production in certain parts of the world. The amount 
of animal foodstuffs coming on the market was thus increased 
while at the same time there was no increase in the demand 
for these relatively expensive foodstuffs. In some cases the 
fall in the price of cheaper substitutes has been considerably 
less than that for animal foodstuffs ; for example, margarine 
has dropped much less than butter. It is a noteworthy fact, 
however, lhat Cor many commodities, such as cotton, coffee 
and cocoa, I lie better-quality grades have Fallen less in price 
than inferior grades. This is probably partly due lo I he lad 



— 162 — 

that the better grades are largely consumed by those classes 
whose expenditure on such commodities has been least affected. 

In the case of organic industrial raw materials, the supply 
cannot readily be adapted to the demand, while at the same 
time demand is very sensitive to changes in business conditions. 
For some articles in this group, such as rubber, the supply 
over short periods is practically fixed. Rubber has fallen more 
in price than any other commodity shown in the chart ; in 
the middle of 1931, its price stood 72 per cent below the 1928 
level, the lowest point ever recorded up to that time. In 1910 
rubber sold in London for 8s. 9d, a pound ; in June 1931 for 
3d. a pound. 

In general, the decline in the price of minerals and metals 
has been much less than that in vegetable foodstuffs and vegetable 
and animal industrial raw materials. The output of the former 
group can be more readily adapted to the changed conditions 
of demand and for many products producers by agreements 
have succeeded in restricting output and maintaining prices. 
Demand for the articles in this group, chiefly producers' goods 
are affected not so much by price as by changes in general 
business conditions. Non-ferrous metals have fallen more than 
iron and steel products or coal, and several of them — such 
as copper, zinc and tin — are now lower in price than before 
the war. The production of copper and tin was greater in 1929 
than in any previous year. The price of copper continued to 
rise throughout 1929, but, with the breakdown of the producers' 
association in the early months of 1930, copper prices fell very 
rapidly ; prices in the middle of 1931 were about 40 per cent 
below the average, for 1929. The fall in the price of silver, which 
has reached the lowest point recorded, forms a separate chapter 
in the history of the depression and is considered in detail in 
another section. 

No world-market price for coal is shown on the chart because 
this commodity, though traded in to a considerable extent, is 
very heavy in proportion to its value and its price is largely 
determined regionally. On certain export markets coal has 
fallen in price by some 15 per cent, but in most markets it has 
remained remarkably steady and in some has even increased 
since 1928. In considering' the relatively slight drop in coal 
prices, as compared both with other commodities and with 
heavy price declines recorded during previous periods of economic 
depression, it should be borne in mind that prices had fallen 
steadily since 1922. ST1 

In the case of iron and steel, centralised control and producers* 
agreements have resulted in production being greatly restricted 
and prices maintained ; in addition, many long-term orders 



— 163 — 

given during the upward swing of the business cycle and extending 
into 1930 have helped to keep up prices in this industry. These 
commodities, like coal, are expensive to transport ; their prices, 
too, are largely regional. 

Thus prices of staple commodities on world markets fell 
between 1928 and the middle of 1931 50-60 per cent for vegetable 
foodstuffs, some 25-30 per cent for animal foodstuffs, 50-70 per 
cent for textiles and 25-50 per cent for minerals and metals. 
On many domestic markets the decline was much less severe, 
particularly in the case of vegetable foodstuffs and minerals. 
In the following table are set out the percentage declines in the 
price of commodities in these groups on some internal markets 
between the middle of 1929 and the middle of 1931. 



Table XIV. — Percentage Decline ( — ) or [Rise (+) in Prices 

of Various Groups of Commodities on Domestic Markets, 

June 1929-June 1931. 



Vegetable foodstuffs. 

Czechoslovakia. ... — 9 

France +4 

Switzerland — 7 



Metals and Minerals. 

Belgium (fuels) .... 
Great Britain (iron and 

steel 

Germany (iron and steel) 



—10 
— 9 



It is obvious that the severity of the present decline in prices 
has been much greater on world markets than on domestic 
markets. Commodities entering into international trade are 
generally the most sensitive in price — to mention only one 
reason for tins, they are traded in large quantities on organised 
exchanges by buyers and sellers who are specialists anil fully 
cognisant of conditions of supply and demand. Regional prices 
are more directly influenced by Customs duties, price-fixing 
agreements, etc. They include certain elements of cost, such 
as taxes, wages, distribution, etc., which are not subject to 
international competition and do not vary in the same way as 
raw material prices. It has already been observed that the 
prices of certain commodities, such as coal and iron, which 
enter to a considerable extent into international trade, are, on 
account of relatively high transport costs, mainly determined 
locally. 

Iron, for instance, fell in price on world markets at the end 
of 1928, in Germany a year later and in Great Brilain six months 
after that. 

In older to illustrate further the marked differences in the 
price movements of international and domestic goods during 



— 164 — 

the depression, relevant indices for France and Germany are set 
out in the following table : 

Table XV. — Price Indices of International and Domestic Goods. 

(1913 = 100.) 





France 




Germany 




Inter- 


Dom- 


Inter- 


Dom- 




national 


estic 




national 


estic 


January 1930 . 


521 


606 


April 1929 . 


130 


135 


December 1930 . 


377 


565 


January 1931 . 


83 


122 


June 1931 . 


366 


539 


April 1931 . 


79 


118 


Percentage de- 






Percentage de- 






cline from Jan. 






cline from 






1930 to June 






April 1929 to 






1931 


30 


11 


April 1931 . 


39 


13 



In these countries the decline in the prices of world market 
goods has been two to three times as great as Lhe fall in the 
prices of domestic commodities. It will be observed, however, 
that, during the first six months of this year, the prices of 
domestic products have kept pace more evenly with those of inter- 
national goods in both countries ; in France, indeed, the former 
have declined more rapidly. The indices do not of course give 
an exact measure of the difference between domestic and inter- 
national prices for the same commodities ; the discrepancy 
between the movements of the two indices is none the less striking 
and is common to other countries such as Czechoslovakia, Denmark 
and Italy, for which such data are available. In Denmark, for 
example, exports fell much more rapidly in price than goods 
produced for the home market. Between the beginning of 
1930 and April 1931, the decline in the former was over 20 per 
cent as compared witli 10 per cent for the latter. The same is 
true of Italy. Between May 1929 and May 1931, according 
to the Bachi index, goods produced and consumed in the 
country fell by 27 per cent in price while goods exported fell by 
34 per cent. 

These differences cannot be explained by a failure of transport 
costs to keep pace with the declining level of international commo- 
dity prices. The most important influences contributing to the 
divergencies have been three in number — first, the influence 



— 165 — 

of tariffs ; second, the success of cartels and producers' associa- 
tions in maintaining the domestic prices of certain classes of 
products ; and third, the fact that regional products consist 
partly of manufactured goods the prices of which have been 
relatively well maintained during the depression. 

When the prices of crude foodstuffs, in particular, cereals, 
began to decline rapidly in 1929, certain States, wishing to 
protect domestic agriculture, raised their tariffs on foreign grains 
and passed special legislation requiring millers to mix a fixed 
proportion of native cereals with those of foreign growth. The 
measures taken by various States have been touched upon in 
the previous section — here it is sufficient to note that, by- ex- 
cluding foreign and compulsorily increasing the demand for 
domestic wheat, they succeeded in their object of raising the 
price of domestic wheat. The following graph (Chart 27) shows 
the relationship between the world-market price of wheat (Hard- 
winters in Rotterdam) and the domestic price in four of the 
countries where this policy has been most conspicuously 
successful. 

Protective tariffs were also imposed (or raised) in some coun- 
tries on other cereals, such as rye and maize, and on certain 
industrial materials. Some States have sought to raise revenue 
by putting higher tariffs on colonial products, such as coffee and 
tea, with the result again that domestic prices have diverged 
widely from world prices. 

A second important influence in causing home-market prices 
to move differently from world prices is the fact that in many 
countries a large proportion of the former are controlled, in par 
at any rate, by cartels or producers' associations. According to 
a recent estimate, the prices of half the industrial raw materials 
or semi-manufactured goods (measured by the numbers employed 
in producing them) used in Germany are thus controlled. For 
other countries the proportion is not known, but there is no 
doubt that it is considerable. 

In the following table are set out the price movements of 
" cartellised " and " non-cartellised " industrial raw materials 
in Germany x and recently compiled indices of " sensitive " 
and " stabilised " prices in Belgium. 2 The two groups are not 
comparable because the Belgian index for " stabilised " prices 
includes those of certain goods which are not subject to marked 
price fluctuation, but are none the less not controlled by 
cartels. 



1 Indices of Inslilul li'ii' KnnjmiM iii'l'iiiscliiintf, Berlin. 

2 indices published l>y Inslilnl des Sciences ccononiiqiies, Luuva.ii!. 






h, 
« 

(J 



►J 

< 
iz 

o 

IH 

H 

W i 
CM 



03 



o 
u 

H 

w 

a 

H 

w 

H 



z 

o 

H 
<1 
iJ 
H 
(X 

W 
« 



166 




£ 

CO 

■d 

CJ 

■*-> 

o 

a 



J5 






— 167 — 

Table XVI. — Price Indices of Cartellised and Non-cartellised 

Goods, etc. 





Germany 
(1926 = 100) 


Belgium 
(IV, 1914 = 100) 




Cartellised 


N011- 
cartellised 


Stabilised 


Sensitive 


December 1928 ... . 
July 1930 .... 
December 1930 .... 
April 1931 .... 


104 

103 

95 

94 


103 
79 


811 

871 
823 


898 
680 
583 



The " free " prices in both countries were declining in 1928, 
while the " controlled prices " rose hi that year and showed 
little change until the first half of 1930. During the second year 
of the depression, the monopolistic control of prices as reflected 
in the above indices lost some of its effect : in the second half 
of 1930, cartellised prices in Germany fell by 8 per cent, while 
stabilised prices in Belgium fell by 6 per cent. Certain cartels 
succumbed to foreign competition, while others broke down 
■on account of their inability to finance stocks. 

A particularly striking aspect of price movements during the 
depression has been the much greater fall in the prices of raw 
materials in genera] than in those of manufactured goods. This 
is not the place to examine in detail the reasons for this pheno- 
menon, which appears to be characteristic of all periods of econo- 
mic depression. The reactions of manufacturers and primary 
producers, in particular agriculturists, to falling prices are of an 
essentially different character ; the former restrict output, while 
the latter often attempt to expand production. The existence 
of stocks of raw materials in the hands of manufacturers and 
merchants cause a more rapid falling off in the demand for these 
goods than in the demand for finished products at the beginning 
of a depression. For these and other reasons, raw material 
prices drop more than prices of manufactured goods. 

In the following table is set out the percentage fall in the 
wholesale price indices of raw material and manufactured goods 
in six countries for which such indices are available ; in each 
case, the fall is measured from June 1929 to June 1931, 
or the last two-year period Tor which indices have been 
published : 



168 



Table XVII. — Percentage Fall in Wholesale Price Indices of Raw 

Materials and Manufactured Goods in Certain Countries, 

June 1929- June 1931. 





Raw 
Materials 


Manufactured 
Goods 




33 


19 


Denmark 


27 


22 


Germany 

Italy 1 

Sweden 


22 
34 
20 


13 
12 
23 


U. S. A. 2 


30 


20 



The peculiar position in Sweden is accounted for by the 
fact that the index for raw materials is heavily weighted by 
iron-ore, for which long-term orders at fixed prices were given 
before the turn of the business cycle ; wheat, the domestic price 
of which has been maintained by special regulations giving the 
millers' organisation the sole right to import foreign wheat and 
requiring them to purchase that of domes tic growth at fixed 
minimum prices, and such regional producers' goods as bricks 
and cement, which are also in large measure subject to monopo- 
listic control. In most other countries the raw-material price 
indices have fallen about half as much again as those for manufac- 
tured goods. But, in the first six months of 1931, the rate of 
decline of manufactured goods increased in some countries and 
in certain cases indeed exceeded that of raw materials. In 
Canada, for instance, fully and chiefly manufactured goods 
fell by some 10 per cent in the first half of this year, as compared 
with an 8 per cent decline in the prices of raw materials and a 
5 per cent decline in those of manufactured goods in the corres- 
ponding period of 1930. In Germany, the fall in the price of 
finished goods in the first half of 1931 was about 5 per cent, 
as compared with 3 per cent in the first half of 1930. 

Evidence of a similar character is found in special indices of 
raw and manufactured goods divided according to origin and 
use which have recently been made available by certain national 
statistical offices. These indices have been published in the 
League of Nations Memorandum on Production and Trade, 1925- 
1930/31. An examination of the recent price movements of 



1 Bachi index. 

2 National Bureau of Economic Besearch Index, April 1929-April 1931. 



— 169 — 

particular raw materials and articles manufactured from them 
shows that in all cases raw materials have been the more 
seriously affected and that, with very few exceptions, the higher 
a commodity stands in the stage of manufacture the less "has 
it fallen in price. 

A comparison between the price movements of agricultural 
and industrial products shows still more striking results. 

In the following table is set out the percentage fall in the 
agricultural price indices of certain countries between 1929 and 
June 1931. The construction of the indices differs greatly, of 
course, from country to country ; in most cases, however, 'the 
importance of any commodity in the index is proportionate to 
its importance in the total value of agricultural production of 
the country concerned. It will be seen that the fall has been 
greatest in the overseas cereal and textile-producing countries 
which are dependent on their export trade, and least in meat 
and dairy-producing countries, such as England, and countries 
which have taken special measures to protect domestic farmers 
such as Germany. 

Table XVIII. — Percentage Fall in Agricultural Price Indices 
of Certain Countries, 
June 1929- June 1931. 

Canada 44 Italy 32 

Argentine ....... 39 Finland 29 

New Zealand 38 Germany . . 21 

U.S.A 33 England 15 

In all countries, industrial products have fallen much less 
in price in the period covered by the table. In Canada, for 
instance, manufactured goods dropped by 20 per cent ; in New 
Zealand the general price-index dropped' bv some 10 per cent. 
In the United States, the 33 per cent fall in agricultural prices 
may be compared with a 25 per cent fall in the price of non- 
agricultural commodities and a drop of less than 20 per cent in 
the prices of articles purchased by farmers. 

The relationship between the prices of raw materials and 
industrial goods is obviously of the greatest importance, both 
for international trade, which is largely based on the exchange 
of these two commodity groups, and for the domestic trade of 
countries with a mixed agricultural and industrial economy, 
such as the United States of America. In the table which follows, 
the import and export price indices of certain industrialised ami 
raw-malerial-producing countries in the years 1929 and 1930 
are shown. 



Table XIX. 



— 170 — 

Import and Export Gold Price Indices of Certain 
Countries, 1929 and 1930. 

(1913 = 100). 





1029 


1930 


Ratio of 












Imports to 




Im- 


Ex- 


Im- 


Ex- 


Exports 




ports 


ports 


ports 


ports 


(1930=100) 




103 


98 


88 


97 


110 


Germany 


126 


132 


109 


124 


114 




134 


159 


117 


152 


130 


Netherlands Indies .... 


155 


123 


146 


88 


60 


Italy 


122 


111 


105 


93 


89 




136 


148 


135 


116 


86 



In 1930, the prices of the imports of the industrialised coun- 
tries fell much more than those of their exports ; and conversely 
with the raw-material-producing countries. The changes in the 
barter terms of trade are strikingly illustrated in the last column 
of the table : countries producing raw materials were able to 
buy a much smaller number of units of manufactured goods 
for each 100 units of their exports, while those exporting manu- 
factured goods received a considerably larger number of units 
of raw materials in return. The effects of these changes in price 
relationships on the character and extent of foreign trade during 
the depression are analysed in some detail in the following section. 

Wholesale and Retail Prices. 

Perhaps no price relationships have given rise to so much 
discussion during the present depression as those between whole- 
sale and retail prices. It is frequently maintained that the fact 
that retail prices have fallen much less than wholesale prices is 
a factor of primary importance in obstructing the flow of goods 
from producers to consumers and that, if retail prices were 
reduced to something like their former position in relation to 
wholesale prices, consumers, whose incomes have been consi- 
derably reduced on account of the fall in wholesale prices (through 
losses on investments, unemployment, etc,) would be able to 
purchase more goods and thus to some extent counteract the 
depressing tendencies. 

In such discussions, a comparison is generally made between 
the wholesale-price and cost-of-living indices of the country 



— 171 — 

concerned. The discrepancy between the movements of these 
two indices in most countries is indeed striking. In Switzerland 
and Sweden, for example, the cost-of-living index fell by only 
7 per cent in the two years ending June 1931, while the wholesale- 
price index fell by about 20 per cent. In the United Kingdom, 
Denmark and Italy, the cost-of-living index fell by about 10 per 
cent, while wholesale prices dropped some 25 per cent. The 
discrepancy between the movements of the two indices is smaller 
in the European States exporting agricultural products, though 
even there it exists — in Hungary, for instance, the cost-of-living 
index dropped by 17 per cent as compared with 25 per cent for 
wholesale prices, and in Latvia 21 per cent as compared with 
27 per cent. 

These comparisons, however, are made between indices the 
composition of which differs so greatly that they are in fact 
incomparable. The ordinary wholesale price indices are in most 
cases composed of crude foodstuffs and raw materials, while the 
cost-of-living indices include only products ready for consump- 
tion. It has already been seen that the price movements of these 
two groups during the depression have been widely different. 
Moreover, the cost-of-living indices generally include rent. 

If the comparison is made between wholesale and retail prices 
of the same or a similar group of commodities, then the margin 
between the two indices becomes much narrower. In the United 
States, for instance, wholesale prices of foodstuffs fell by 26 per 
cent between the middle of 1929 and the middle of 1931, while 
retail prices fell by 24 per cent ; in Sweden, wholesale prices of 
vegetable and animal foodstuffs fell by 17 and 23 per cent respec- 
tively, while retail prices of foodstuffs fell by 16 per cent. In the 
agricultural States of South-Eastern Europe, which have a net 
export surplus of raw foodstuffs, retail foodstuff prices followed 
wholesale prices even more closely. The difference in the rate of 
decline of wholesale and retail prices is much greater in the case 
of clothing. Retail clothing prices fell but little during the first 
year of the depression, and except in a few countries — for 
instance, Italy and Germany, which took special measures to 
reduce retail prices — they rarely fell by more than 10 per cent 
in the second year (June 1930-31). 

The relatively small increase in retailers' margins on foodstuffs 
is explained by the fact that the inventory turnover of this class 
of products is rapid ; only small stocks are carried and a fall in 
wholesale prices is usually closely followed by a corresponding 
drop in retail prices. Stocks of clothing carried by retailers are 
larger and margins are accordingly wider during a period of 
falling prices. The regional character of retail trade often enables 
the retailer to fix his prices with reference to those paid by liim 




— 172 — 

some time previously and thus escape part at least of the inven- 
tory loss. The costs of retailing (rent, services, etc.) do not 
fluctuate nearly so widely as the costs of the goods handled and 
it is obvious that, when sales fall off, prices — if they are to coyer 
costs — must include a wider margin per unit sold ; large margins 
in such a case do not necessarily imply large profits. 

The reductions in the rates of wages paid to industrial workers 
have in general not been great ; in most countries and in the 
majority of occupational groups, they have not kept pace with 
the decline in the cost of living, In the following table are set 
out the movements of real industrial wage rates in the years 1928, 
1929 and 1930 in certain countries for which information is 
available. 

Table XX. — Indices of Real Wage Rates in Industry 1928-1930. 

Pre-War = 100. 





1928 


1929 


1930 


Czechoslovakia . 


116 


119 


125 


Germany . . . 


107 


110 


116 


Great Britain . 


103-106 


106-109 


110-113 


Sweden 1 . . . 


132 


138 


146 


U. S. A. 2 . . . 


135 


142 


135 



These indices are not comparable from country to country, 
but their general trend, except in the United States, was similar : 
in all cases wages, with this one exception, either rose in 1930 or 
remained stationary while the cost of living was falling. Wage 
rates per hour or per week are of course not a completely satis- 
factory measure of labour cost. In the first place, the wage-rates 
used for most countries are minimum rates ; in many cases, actual 
wage rates paid in 1928-29 were considerably higher than these 
minima, and hence the real reductions since those years have been 
in some countries and for some industries different from those 
indicated. Further, under the fear of unemployment, the 
efficiency of workers may have increased so that real cost per 
unit of output may not have increased so rapidly as money rates 
paid. It will be noticed that in Sweden even the real daily 
earnings of industrial workers rose in 1930 ; as these include some 
short-time daily rates must have risen even more. The real 
weekly earnings of those engaged in manufac Luring industry in 
the United States fell throughout 1930 ; hourly earnings rose 



Daily earnings. 
; Weekly earnings 



— 173 — 

somewhat. None of the indices shown above make any allowance 
for unemployment and therefore yield no evidence regarding the 
purchasing power of the industrial wage-earners as a whole. 
The index of factory pay-rolls published by the United States 
dropped by 19 per cent in 1930 in comparison with 1929. 

The movement of wages has of course varied from industry to 
industry. In the United States, the greatest reductions since 
1929 have taken place in the lumber and millwork, boot-and-shoe 
and bituminous coal industries. Of the manufacturers reporting 
to the Bureau of Labor Statistics, 5 per cent made wage cuts in 
the first ten months of 1930, as compared with 82 per cent in the 
first ten months of 1921. In Germany, average hourly rates of 
both skilled and unskilled workers rose steadily in 1929 and 1930. 
Wage rates in the building industry reached their highest point 
in April 1930. In several industries a 6 per cent reduction in 
tariff rates took place in the early months of this year ; reductions 
were greater in the textile industries and less in municipal services, 
such as gas, water and electricity. The salaries of State officials 
were also reduced. Similar action was taken in Italy, where the 
average hourly earnings of all groups reached its highest point in 
September. Between November 1929 and the beginning of this 
year, the average hourly money earnings of those engaged in 
public industries declined by 17 per cent ; in the same period the 
cost of living fell by slightly more than 10 per cent. In Great 
Britain, reductions in money rates of pay in 1930 affected 
mainly builders, bakers, furniture-makers and road transport 
workers. In Sweden and the Netherlands, the wages of workers 
engaged in the home-market industries have remained steady or 
increased somewhat throughout the depression, while those of 
workers engaged in export trades have tended downwards. For 
other countries there is not sufficient evidence to allow a general 
statement with regard to differences in the wage movements of 
these two groups to be made, but such indications as are available 
suggest that wage cuts have been somewhat greater in export 
than in home-market industries, in the building industry, in 
particular, and in industries producing foodstuffs and beverages, 
wages would appear to have been maintained at a relatively high 
level in most countries. 

In Canada and the United States, agricultural wages fell by 
some 10 per cent in 1930 and continued to fall in 1931 ; in the 
second quarter of the latter year, daily wages for this group in 
the United States were 23 per cent lower than in the corresponding 
quarter of 1929. In certain other countries, the money rates paid 
to agricultural workers did not fall, but the standard of living of 
these workers was affected by a deterioration in the quality of 
board provided, etc. 



— 174 — 

Profits. 

The wide percentage margin between raw material and 
finished product prices during a period of depression does not 
result in high profits — heavy losses are sustained through depre- 
ciation of inventories and when the volume of output diminishes, 
much the same, overhead charges must be spread over a smaller 
number of units, so that cost per unit rises. 

Profit statistics are available for relatively few business 
concerns and for only a few countries. In the United States of 
America, the profits of 1.900 corporations reporting to the National 
City Bank were 40 per cent less in 1930 than in the boom year 
1929, and 28 per cent less than in 1928. The net return on the 
capital invested in these concerns dropped from 11.4 per cent in 
the second quarter of 1930 to 4.1 per cent in the fourth quarter. 
Profits varied greatly from group to group. They were best 
maintained for purely home industries such as public utilities and 
amusements and recreations ; the tobacco industry also increased 
its profits slightly. The greatest decline took place in the rubber 
industry, where profits in 1930 were 90-100 per cent lower than 
in 1929, in the metal and pig-iron industries (70 per cent lower), 
petroleum, railways and automobiles (50-60 per cent) and banks 
and insurance companies (40-50 per cent). Dividend payments 
reached their highest level in the first half of 1930 ; since then 
they have been fewer and smaller. In the first quarter of 1931, 
profits amounted to 5.3 per cent of capital invested ; the increase 
over the last quarter of 1930 is evidently due to the writing-off 
of large amounts of capital through business failures. For certain 
industries, such as the petroleum, textile and non-ferrous metals, 
profits in the first quarter of 1931 were nil, while those of the 
iron-aud-steel industry were reduced by 85 per cent and 
automobile by 50 per cent since the corresponding quarter of 1930. 
In Germany, average profits by enterprise were 25 per cent 
lower in 1929-30 than in 1928-29. 

The profit statistics available for Great Britain are very 
incomplete and cannot be regarded as representative of industry 
in general. According to such data as are available, profits drop- 
ped only slightly in 1930 ; they were, however, not high m 1929. 
In the first half of 1931, profits were 15 per cent lower than in the 
corresponding period of 1930. As in the United States the 
greatest losses have been suffered by the rubber industry — 
their profits in the period June 1930-31 were over 80 per cent 
lower than in June 1929-30. The decline was particularly heavy 
in the textile industries (57 per cent) and also in tea and financial 
land investment (28 per cent), motors and cycles (13 per cent) 
and iron, steel and coal (18 per cent). As in the United States, 
purely regional businesses such as public utilities and tramways 
increased i heir [unfits slightly. 



— 175 — 



C. Financial Conditions. 

Although the European markets did not share in the American 
Stock Exchange boom in 1929 and, indeed, except for a few 
months in the early summer suffered from a decline in the 
prices of shares, all participated in the autumn slump and 
their further development corresponded to that of New York. 
Everywhere stock prices declined throughout 1930 and in 1931. 
In a majority of markets a temporary improvement — in some 
cases, indeed, a substantial improvement — was experienced in 
the beginning of the present year, as in 1930. In the decline 
which followed, however, new low records were reached. 

The violence of the drop from the highest quotations in 
recent years to the average quotations in June 1931 is shown 
in the following table : 

Table XXI. — Percentage Reduction in Prices 
of Industrial Shares. 

Per cent 

Germany .... From April 1927 to June 1931 61.7 

Netherlands ... » March 1929 » » » 60.0 

U. S. A » September 1929 » » » 59.7 

France » February 1929 » » » 55.7 

United Kingdom . » January 1929 » » » 45.0 

Sweden » July 1929 » » » 30.6 

Switzerland ... » September 1928 » » » 29.3 



The market value of all stocks quoted on the New York 
Stock Exchange, which had risen from $38,376 million in January 
1927 to $67,478 million in January 1929 and $89,668 million 
in September 1929, fell to $63,589 million in December 1929 
and to $48,470 million in May 1931. 

According to statistics of the New York Stock Exchange, 
the velocity of turnover of shares (ratio of monthly sales of 
stocks to monthly average number of listed shares) fell from 
about 10 in summer 1929 (it rose as high as 13 during the 
panic in October 1929) to 4 in April 1931. Similarly, the volume 
of credit engaged in market operations diminished and brokers' 
loans reported by the New York Stock Exchange were reduced 
from .18,5-19 million at the beginning of October 1929 to $1,651 
mi I lion ill the beginning of May 1931. At the first, date brokers' 



— 176 — 

loans had amounted to nearly 10 per cent of the market value 
of all listed shares ; by the latter date they had fallen to less 
than 3 y 2 per cent. New issues also declined heavily as the 
following table shows : 

Table XXII. — Issues of Shares of Joint Stock Companies. * 

),000's omitted). 



1928 . 

1929 . 

1930 . 



France ' 



Germany" 



255 
333 
148 



321 
235 
132 



,.y ni ' ed J u.s.a.< 

Kingdom* 



759 
714 
194 



4,961 
8,035 
1,880 



For the decline in new shares, the depression of stock markets 
and the generally unfavourable conditions of business are 
responsible. Issues of companies not directly engaged in pro- 
duction or trade, such as banks, insurance companies, etc., 
which had profited greatly while the boom had lasted, were 
affected particularly heavily. Thus, for example, in the United 
States the " non-productive issues " of shares, 6 which include 
banks, investment trusts and certain holding companies, dropped 
89 per cent in the course of 1930 while the total of new shares 
offered declined only 77 per cent. 

As might be expected, with the rapid contraction of trade 
in shares in the months following the break, transactions in 
bonds increased and the prices of fixed-inte rest-bearing securities 
rose, especially on the leading markets. But trading in bonds 
soon grew less active, and in New York the volume of sales of 
bonds" has actually remained considerably below that of 1929 
since the spring of 1930. Similarly, the rise in bond prices 
was most pronounced at the end of 1929 and in the first few 
months of 1930 ; in the spring of the latter year the upward 
tendency in prices was to a large extent arrested, Switzerland 



* Sources : 

1 Statislique generate de la France. 

2 Institut fur Konjimkturforschung. 

3 Economist, March 28th, 1931. 
1 Standard Statistics. 

5 Classification of the Standard Statistics. 



— 177 — 

was an exception to the rule ; in this country the biggest increase 
in bond prices took place after June 1930. 



Table XXIII. — Prices of Bonds. * 





France 


Germany 


Italy 


Nether- 
lands. 


Switzer- 
land 
12 Swiss 


U. K, 
Fixed 


U. S. A. 




35 bonds 


8 % Gold 


Govt. 


Fixed 


bonds 


security 


40 bonds 


Average 


com- 


mortgage 


bonds 


security 


(Confede- 


values 


com- 


bined 


bonds 


Bachi 


values. 


ration & 


index 


bined 












C. F. F.) 


number 






1913 = 


per cent 


1913 = 




1906-25 = 


1921 = 


per cent 




100 


of par 


100 




100 


100 


of par 


1928 . . 


81 


97.24 


69.2 


_ 


93.48 


112.33 


84.06 


1929 . . 


85 


94.44 


66.9 


— 


94.80 


110.15 


79.21 


1930 . . 


95.8 


97.30 


69.3 


98.07 


107.76 


111.75 


81.25 


1931 I 


95.7 


99.03 


71.07 


98.98 


117.24 


112.8 


81.98 


II 


97.1 


99.41 


72.38 


98.52 


116.93 


109.7 


82.06 


III 


97.9 


99.82 


72.1 


98.41 


115.40 


111.6 


82.29 


rv 


99.0' 


100.17 


72.6 


97.76 


116.93 111.3 


80.86 


V 


98.4 


99.84 


71.2 


98.13 


116.62 110.8 


80.48 


VI 


98.8 


— 


71.9 


98. 60)115. 40 111.1 


— 



The bond markets were very sensitive and the various classes 
of securities fared very differently. On the American markets 
railroad debentures were little in demand because of the low 
earnings of railroad companies. The discrepancy between the 
price of gilt-edged and other bonds was more pronounced than 
in previous years. While securities of the highest grade increased 
considerably in price, second-grade bonds, to which a greater 
degree of risk was attached found few purchasers in spite of the 
lii^h yield which they offered. Also, political uncertainties and 
bank failures in some countries had a disquieting effect. 

Tlie value of new bond issues on the three principal markets 
is sliown in the followings table : 



Sources : 

Slalistique generalc de la France. 

Inslilui tin- Konjunklurforschung. 

I Vol'. Bachi. 

Uol It'Mlaiiisclic liankvcreiniging. 

Banqilis Nationals Suisse. 

Hankers' Magazine. 

1 )ow .J 011O.S and Co. 



— 178 





Table XXIV. — Bond Issues. 1 
$ (000,000' s). 






U. S. A. 


U.K. 


France 2 


1928 . , 
1929 





6,888 
3,375 
4,680 


1,037 

672 

1,110 


157 
266 


1930 


686 



In the United States and the United Kingdom the new issues 
of bonds in 1930 did not reach the level of 1928 and preceding 
years, although some increase on the figures for 1929, in which 
bond issues had been exceptionally low, was recorded. As the 
depression advanced, the market became more and more loath 
to accept new issues, and in the first quarter of 1931 the. issues 
recorded in England and the United States were substantially 
lower than in the corresponding period of 1930. 

A large proportion of the new bond issues in 1930 were on 
Government account, and the issue of the Young Loan for more 
than $300 million was one of the most important events of the 
year on the world money markets. The Government borrowing 
was largely due to the fact that public expenditure has proved to be 
highly inelastic and not easy to reduce in the face of a contracting 
revenue — resulting, for example, from diminished returns of 
taxes, Customs duties, diminished earnings of State railroads, 
domains and public-utility services. In some countries, indeed, 
public expenditure has increased on account of unemployment relief, 
etc. To increase taxation presented obvious and serious difficulties, 
and in many countries deficits were covered by loans. 

A striking feature of the long-term capital market in the period 
under consideration was that "long-term rates failed to decline 
to any substantial extent (compare the table on Bond Yields 
in Chapter V B). In Chapter I C have been in cheated the 
main reasons for this phenomenon, such as the fears of 
capitalists regarding economic and political conditions ; the 
unwillingness of capitalists to accept substantial reductions in 
the rates of interest they had been accustomed to receive in 
post-war years and their anxiety to have liquid resources 
available in case business should revive. A certain downward 
trend in the long-term rates was, indeed, apparent, but it was 



1 Sources : Standard Statistics. 
The Economist. 

Statistique generate de la France. 
a Excluding issues of large railway companies (1928 : $146 million ; 1929 : 
166 ; 1930 : 201. 



— 179 — 

neither strong nor general. The trend in the main creditor 
countries was very different from that in certain important debtor 
countries. Although the following figures are not at all strictly 
comparable, they afford some idea of the extent of this discrepancy. 
At the end of 1930, the average yield of Government and high- 
grade bonds in eight creditor countries was 5 per cent or less and 
showed a tendency to fall, while in seven debtor countries the 
yield of similar bonds was between 8 and 13 per cent and showed 
a tendency to rise. 1 

The decline in short-term rates, on the other hand, was almost 
universal and in many cases substantial. A considerable discre- 
pancy between the price of long- and short- term capital accord- 
ingly resulted. This may be illustrated by the following data 
showing averages of bond yields and of market discount rates 
in three markets during the first half of 1928 and the second half 
of 1930. The discount rates represent a somewhat lower interest 
rate than that actually paid by the borrower (the discount being 
deducted by the lender from the face value of the bill) ; they 
have therefore been increased to correspond with the latter rate. 



Table XXV. — Comparison of Long- and Short-Term 
Interest Rates. 



1928 

Jan.- June 

per cent 



1930 
July-Dec. 
per cent 



United Kingdom 

Yield of 2y 2 % consols 

Minimum market discount rate (adjus- 
ted) 

Discrepancy 

(Jxiited States : 

Yield of railway bonds 

Mini inn in rate of bankers' acceptances 

(adjusted) 

Discrepancy 

Switzerland : 

Yield of 3%% railway bonds 

Minimum market discount rate (adjusted) 
Discrepancy 



4.47 

4.06 
0.41 



4. IS 

3.63 
0.55 



4.46 

3.23 
1.23 



4.42 

2.12 
2.30 



4.30 

1.91 
2.39 



3.93 
1.40 

2.52 



'Nee iniiic published in llio " Mvnwrondum mi tntirnationol Tradu ami 
Hutfimw o\ Payimnt*. I!)'.'.V ur.'.'.i '', Vol. II. 



— 180 — 

The fact that long-term rates fell relatively little explains 
why no considerable conversion of short-term into long-term 
debts has taken place. Individuals and governments wishing 
to borrow on either foreign or domestic markets were obliged 
to cover a large proportion of their capital requirements by 
short-term loans. 

Events in the short-term capital market may be studied 
in the light of movements of market rates of discount shown 
in Table XXVI and in the graph given in Chapter IV C 
representing rates of private discount and average rates for 
New York call loans. 



Table XXVI. — Market Rates of Discount and Call Money. 1 
(Monthly averages.) 





New York 


London 


Paris 


Berlin 






Coinm. 
paper 


Call- 
nioney 


Zurich 


1929 October. . . 
December . . 


6.25 
5.03 


6.43 
4.83 


6.13 
4.75 


3.53 
3.48 


7.28 
6.98 


3.38 
3.15 


1930 June .... 
September . . 
December . . 


3.55 

3.0 

2.88 


2.62 
2.19 
2.23 


2.31 
2.06 
2.31 


2.06 

2.0 

2.06 


3.58 
3.30 
4.83 


2.06 
1.50 
1.18 


1931 March . . . 
June .... 


2.52 
2.0 


1.57 
1.45 3 


2.59 
2.09 


1.69 
1.06 


4.76 
6.09 


0.99 
1.13 



Although the rates quoted arc not entirely representative, 
they show the tendency of the markets. Rates declined most 
rapidly immediately after the break in the stock markets, and 
during the first half of 1930. Call loans were especially cheap • 
while in July 1929 the rate for such loans in New York averaged 
more than 9 per cent (renewal rates) and occasionally rose as 
high as 15 or 20 per cent, it had fallen to less than 5 per cent 



1 Source : League of Nations Monthly Bulletin of Statistics and Federal Reserve 
Bulletin. 

2 Renewals. 

3 May figures. 



— 181 — 

in December 1929, and since January 1931 has fluctuated around 
1 y 2 per cent. 

The difference in the conditions of the various markets must 
again be emphasised. The intensity of the decline in market 
rates varied greatly from country to country. In one group 
of countries cheap-money conditions prevailed ; in another, 
although rates were lower than during the boom years, they 
were still comparatively high. The agricultural countries of 
Eastern Europe belonged to this latter group, together with 
some non-European countries producing raw materials, to the 
unfavourable financial position of which reference has already 
been made. Conditions in Germany after September 1930 
brought about a considerable increase in the rates in this 
country. 

The fall of the open market rates went hand in hand with 
a progressive reduction of discount rates and did not stop before 
June 1931. (See Chart 28.) 

In London, a more normal relation between the bank rate 
and the market rate was re-established and the margin, which 
was very narrow in 1927, 1928 and 1929, was again substantial 
in 1930 and the. first quarter of 1931. Nevertheless the money 
rates in London were higher than in Paris and New York, as 
the Bank of England from considerations of external banking 
policy maintained the discount rate at a level appreciably higher 
than in those centres. 

A general contraction in the volume of bank credit might 
have been expected in view of the fall in the price level and the 
decline in business activity. The actual reduction in bank 
credit has, however, varied widely. Central bank credit declined, 
except in France and a few other countries. In the field of 
commercial banking, certain kinds of credit have been restricted 
more than others and different countries have been variously 
affected. (See Chart 29.) 

In the United States, there was an increase in the figures 
for advances on securities and security holdings immediately 
after the market break, when the New York banks had to step 
in and themselves replace the loans to brokers called in by 
private banks, individuals, corporations and foreign bankers. 
They were subsequently able to withdraw this temporary help ; 
security loans, nevertheless, tended to rise until the summer 
of 1930, since when they have declined steadily. The figure 
for loans outstanding diminished considerably (the drop was 
over 12 per cent between October 1929 and March 1931 with 
;ill member-banks in the United States), while holdings of securi- 
ties i'0S<2 about 14 per cent, largely on account of the lack of 
oilier uses lor funds. 



— 182 — 

Chart 28. 
Rates of Discount of Central Banks. 



h 



V 



> ; PAf?/5 



lO/VtXJtf 



DQOOOOO 1 
Zt/J?fcft 



ro*rfo 



fjxrsvS * Ziffle/?} 



1 ] I 1 I 1 I 1 I I I I I 1 Mil t I I I 1 I I I 1 I I M I I 1 I I J 




1927 



1926 



1929 



1930 



1931 



S.B.A/.rrt!*} JW 



Source : League of Nations Monthly Bulletin of Statistics, 



— 183 — 

Chart 29. 

Loans and Discounts of Commercial Banks, 1929-1931. 
(January 1929 = 100.) 



M 



'25 



90 







eayAt/*?£-&w/ 
w/treo fMGaoM 



.% QW. rwnS47 



III VI K ffl [II H IX- XJ III V 
1929 1930 IMJ 



France : Loans and advances (lour commercial banks). 
German : miscellaneous loans and commercial bills (six Berlin banks). 
Japan : total loans (Tokio banks). 
Sweden : loans and discounts (joint-stock banks). 

United Kingdom : loans, overdrafts and commercial bills discounted (London 
clearing banks). 

United States : total loans of reporting member banks. 
Source : Federal Reserve Bulletin. 

Uilanziibersichten Dcutscher Krcditbnnkcn. 

Committee on Finance and Industry, Report, June 1931. 



— 184 — 

In the United Kingdom, bank credit on the whole also tended 
to decline ; the contraction in 1929 began even earlier than in 
the United States, but was, on the whole, not nearly so severe. 
Loans and overdrafts were on an average considerably smaller 
in 1930 than in 1929, but discounts of commercial bills increased 
up to may 1930 when they were greater than at any previous 
date since the beginning of 1921. Subsequently, however, 
commercial discounts fell off more rapidly than loans and 
advances. On the other hand the banks' holdings of Treasury 
bills rose 100 per cent between December 1929 and December 
1930. Investments increased 20 per cent in the course of 1930 
and continued to rise in the spring of 1931. The fact that 
production in the United Kingdom dropped less than in most 
other countries after the outbreak of the depression may 
partly account for this increase in bill transactions. Bank 
clearing also fell off less than might have been expected in view 
of the magnitude of the decline in prices and in the stock market 
activity. 

In Germany, discounts of commercial paper decreased, but 
advances on current account rose. Withdrawals of foreign 
crediLs from Germany brought about a development very different 
from that experienced during previous depressions. Nevertheless, 
bank credit rapidly declined and the total volume of new credit 
extended to private enterprise (including shares, bonds, mort- 
gages and short-term bank credit) was much smaller than in 
the preceding years. According to the Institut fur Konjunktur- 
forschung, this new credit amounted in the years ending 



March 31st, 1929, 
March 31st, 1930, 
March 31st, 1931, 



to 7,700 million RM. 
to 4,700 million RM. 
to 2,600 million RM. 



In the months immediately following the break in the stock 
market in the autumn of 1929, considerable funds were tied up 
in frozen loans on securities, but gradually loans on collateral as 
well as advances to industry were substantially reduced by the 
non-renewal of credits and by writing off old debts. 

The volume of deposits in most countries did not change sub- 
stantially, but there was evidence of a shift from sight to time 
deposits, probably due to the slackening in business activity. The 
following table shows how the ratio of sight deposits to the total 
volume of commercial bank deposits has declined in certain 
countries. 



185 



Table XXVII. — Commercial Bank Deposits in Certain Countries. 











Current accounts 


Countries 


End of : 


Total deposits 


and sight deposits 
as percentage of 










total deposits 


U. S. A. 


June 


1929 


31,761! 


58.3 


Member Banks 


Dec. 


1929 


32,170 


59.4 


$(000,000's) 


June 


1930 


32,505 


57.9 


Dec. 


1930 


32,314 


57.7 




May 


1931 


32,168 


57.3 


Germany 


June 


1929 


11,414 2 


41.0 


All reporting 
Kreditbanken 


Nov. 


1929 


12,113 


37.1 


June 


1930 


12,751 


41.4 


RM (000,000's) 


Nov. 


1930 


11,207 


40.7 




June 


1931 


9,521 


45.4 


Canada 


June 


1929 


2437 1 


31.4 


Chartered banks 


Dec. 


1929 


2,163 


33.7 


$(000,000's) 


June 


1930 


2,034 


30.7 


Dec. 


1930 


2,068 


31.0 


Sweden 


June 


1929 


3,462 


19.1 


All banks 


Dec. 


1929 


3,481 


18.9 


Kronor (000,000's) 


June 


1930 


3,648 


18.9 




Dec. 


1930 


3,631 


18.8' 




June 


1931 


3,631 


18.0 


Czechoslovakia 


June 


1929 


28,433 1 


66.4 


Joint Stock Banks 


Dec. 


1919 


29,486 


66.0 


and " Landes- 


June 


1930 


29,389 


64.6 


banken " 


Dec. 


1930 


30,407 


64.0 


Crowns (000,000's) 











The velocity of circulation of deposits declined rapidly. 
Accordingly to the New York Federal Reserve Bank, the velocity 
of circulation of bank deposits in New York City in the first six 
months of 1931 was considerably less than one-half what it was 
in the corresponding period in. 1929 and about one-third of the 
velocity attained in the autumn of that year. 

Notes in circulation tended to decline in most countries, 
while deposits with Central Banks tended to increase. In France, 



1 Excluding Government deposits. 

2 Including sums due to banks. 



— 186 — 

on the other hand, where the internal price level was relatively 
low when the depression started, the currency circulation increased 
during 1930. Only in France, Belgium, Spain, Lithuania, Uru- 
guay and Russia was the volume of notes in circulation consider- 
ably higher at the end of 1930 than at the end of 1929. In Russia, 
the increase was especially pronounced ; between 1928 and 1930 
the volume of bank and State notes in circulation in Soviet Russia 
was more than doubled and in 1930 alone rose by 60 per cent. 

The unfavourable business conditions seriously affected the 
earnings of banks and many banks lost heavily through the 
insolvency of debtors. 

The following table shows the growth in the number of failures 
in France, Germany, Italy and the United States, according to 
the available statistics. The returns on which these percentages 
are based do not cover the same classes of failures in each country, 
and are therefore not comparable. They do serve, however, as 
a rough indication of the change in business conditions in the 
countries considered. 



Table XXVIII. — Percentage Increase, between 1928 and 1930, 
in Number of Bankruptcies. n 2 

(Monthly average.) 





France 


Germany 


Ualy 


United 
States 


1928 

1929 

1930 


100 
106 
111 


100 
123 
142 


100 
104 
117 


100 

99 

119 



Many banking institutions could not stand the strain and, 
having incurred losses either through the insolvency of debtors 
or on their investments, had to suspend payments. Actual failures 
of bankers and brokers at the time of the break in the stock 
markets in the autumn of 1929 and immediately after were 
remarkably few. Most of the important bankruptcies occurred 
after a year or more had elapsed ; they were especially numerous 
in the summer of 1931. 

The number of bank failures varied largely with the conditions 



1 Source : League of Nations Monthly Bulletin of Statistics. 

! {According Lo Lhe terminology in use in each country.) The figures for France 
and Ualy refer to traders, and those for Germany to finis inscribed on the Trade 
Registers, Those for the V. S, cover individuals, firms or corporations engaged 
in ordinary commercial operations ; suspensions of hanks and other slrielly finan- 
cial instil nl ions are included, but failures of professional men as well as or stock- 
brokers and real-estalc dealers arc excluded. 



— 187 — 



of banking in the different countries. Figures available for the 
United States show that bank suspensions, which amounted to 
less than 500 in 1928, rose to 650 in 1929 and 1,350 in 1930. In 
the early part, of the latter year, an epidemic of failures, largely 
con fined to small banks in rural districts, broke out in the Middle 
West and South ; some banks in the large commercial centres 
also went into liquidation. Although numerous, these suspensions 
involved in most cases relatively small sums. In the first half 
of 1931 the number of bank failures was 778 as against 
542 in the same period of last year. Special difficulties had to be 
dealt with by banks in countries where large sums were tied up by 
the financing of stocks of commodities which depreciated in value, 
or bv large credits to industries which became illiquid during the 
depression. In countries where there exists a close connection 
between banking and industry — especially Central European 
countries — industrial credits became frozen to a serious extent. 
Owing to this factor, combined in some cases with the withdrawals 
of foreign credits, certain banks of importance in Central and 
Eastern Europe were forced temporarily or permanently to cease 
operations. 

The strain on the reserves of some Central Banks which 
was felt in 1929, was greatly increased in 1930 and 1931. Foreign 
exchange rates became seriously disturbed and reacted readily 
to risk factors, both political and economic. The value of the 
Spanish peseta, certain Latin-American currencies and the 
Australian pound fell considerably and events in the summer of 
1931 seriously affected a number of European exchanges. _ The 
decline in the price of silver involved a substantial drop in the 
Chinese exchange. 

Table XXIX. — Percentage Depreciation of Certain Currencies. 1 





Average 
May 1929 
per cent 


Average 
May 1930 
per cent 


Average 
May 1931 
per cent 


Discount against Dollar. 

Spain 

Argentine 

Brazil 


— 26 

— 1 

— 1 

— 6 

— 1 
1 


— 37 

— 10 

— 1 

— 11 

— 1 

6 

4 


— 48 

— 27 

— 44 


Uruguay 

Venezuela 

Discount against Pound Sterling. 

Australia 

New Zealand 


— 41 

— 15 

23 

8 



Source : L&ayiU <</ Notions Munlhlji lliillrlin nj Sltitixlirs. 



— 188 — 



Attempts to build up confidence were made in various ways. 
Of these may be mentioned the establishment of several institu- 
tions for long-term credit. In the field of short-term credit, a 
new factor was introduced by the establishment of the Bank of 
International Settlements in connection with the Young Plan. 
An International Agricultural Mortgage Credit Company is 
in the course of formation under the auspices of the League of 
Nations. 



Table 


XXX. — Savings 
$ (000,000's 


Bank Deposits. 1 

>)- 2 






United 
States : 

N. York 

State 
Savings 
Banks 


United 

Kingdom : 

Post Office 

and Trustee 

Savings 

Banks. 


France : 

Caissc 
nationale 
d'epargne 


Germany : 

Savings 
Banks 


Italy : 

Savings 
Banks 

Posl ats 
and Others 


1928 Dec . . 

1929 Dec. , . 

1930 Dec. . . 

1931 April. . 


4,406 
4,392 
4,792 
5,059 


1,953 
1,956 
2,030 
2,086 


345 
444 
575 
657 


1,668 
2,158 
2,479 
2,658 


1,251 
1,334 
1,431 
1,493 



Although the figures of such visible savings as those given by 
way of sample illustration above rose in almost all countries, the 
increase was much smaller than in the years preceding the depres- 
sion. In many countries, indeed, accruing interest was largely 
responsible for the increase. The following figures for Germany 
are significant : 

Table XXXI. — Changes in Savings Banks Deposits in Germany. 3 
R.M. (000,000's omitted). 





Monthly average increase 




t +„i Due to 
lotal . . . , 
Increase "teres I and 
mciease | valorisation 


Due to cash 
deposits 


1929 

Jan.-May 

June-Dec. ...... 

1930 and 1931 

Jan. -July ...... 


202 
145 

142 
129 


55 

47 

49 

68 


147 
98 

93 
61 



1 Source : League of Nations Monthly Bulletin of Statistics. 

2 Converted in dollars a1 par. 

3 Source : WiH-henbcvichl tins Insliliils ji'ir Konjanktur/orsCfiunff, April 15I li, liCil . 



— 189 — 

This table shows that the rate of savings in Germany has 
fallen steadily since the first half of 1929, and it is probable 
that similar tendencies were experienced in other countries. 

Events in Europe in the spring and summer of 1931 weakened 
the confidence of depositors in certain countries ; as a result the 
amount of new savings brought to commercial banks fell off 
considerably, deposits were withdrawn on a large scale and 
hoarding in various forms occurred. For the same reason, capital 
was sent from certain countries in Central Europe with a high 
interest level to others which were considered more safe — ■ in 
particular — Switzerland. 



D. Foreign Trade and Shipping. 

The violent disturbances in the field of production and 
prices were reflected in the movements of international trade. 
It is noticeable, however, that, during the depressions experienced 
towards the close of the 19th and the early part of the 20th 
centuries, changes in the value of international trade were 
chiefly due to price movements and relatively little to changes 
in the quantities exchanged. As far as can be judged from 
not very satisfactory figures for the quantum of trade in the 
pre-war periods of depression, the figures of the volume of trade 
deviated little from the rising long-period trend. According 
to estimates by Professor Wagemann \ the volume of world 
trade dropped during the depression in the early 'nineties, as 
well as after 1907, by 7 per cent below the long-period trend, 
while there was hardly any such reduction after the crisis in 
the year 1900. Estimates * on a similar basis for world trade 
in the first quarter of 1931 show a reduction of no less than 
20 per cent. 

Such figures indicate that an exceptionally violent disturbance 
of world economic relations has occurred. International trade 
has not, as on many earlier occasions, been able to serve as a 
safety valve for the extraordinary pressure existing within 
certain main economic organisms ; the reason is probably that 
the latter half of the present depression has been more uniformly 
worldwide in character than those in the decades before the war. 
It is also possible that the reduction in international capital 
transactions after the summer of 1930 has been relatively greater 
than during pre-war depressions, and that this has served to 
restrict international trade. Another fact of some importance 
is Hie increase in tariffs which has taken place, during the last 



Struktur mi Rbstnmt dor Wtltu>Mnha}t," Berlin 1031, page 157. 



190 



two years. Not only has the real weight of the specific duties 
been increased in proportion to the decline of wholesale prices, 
but actual increases of duties and other impediments to the 
trade in foodstuffs have been numerous and considerable. 
Consequently, the free world market for such commodities has 
been greatly restricted. World-market prices of foodstuffs 
have been adversely affected, and the purchasing power of 
certain important foodstuffs-producing countries has declined ; 
these countries have therefore been forced to restrict the volume 
of their imports of manufactured goods, of which prices have 
declined relatively little. 

The value of world trade continued on a high level during 
the first three quarters of 1929, and has since then declined 
continuously (compare Chart 14 in Chapter IV). The rate of 
this decline seems to have been surprisingly constant throughout 
the depression period. In the second half of 1930, the value 
of imports in forty-five countries — representing 88 per cent 
of total world trade — fell short of the figure for the corres- 
ponding period of 1929 by more than 24 per cent. In the first 
quarter of 1931, the reduction, compared with the corresponding 
period in 1929, was no less than 36 per cent. The reduction 
for export values was even somewhat greater (38 per cent), as 
may be seen from the following table. 

Table XXXII. — Changes in the Value for Foreign Trade 
in Certain Large Regions. 





In per cent of corresponding 
half-year in 1929 


First 
of 1931 


juartcr 
in per 




First half 1930 


Second half 1930 


quarter of 1929 




Imports 


Exports 


Imports 


Exports 


Imports 


Exports 


Europe 1 

North America . . 
Rest of world . . 


90 
82 
82 


93 
79 
76 


82 
65 
66 


80 
69 
67 


71 
52 
55 


72 
50 
53 


Total .... 


87 


85 


76 


75 


64 


62 



The reduction was much smaller in the case of Europe than 
for the rest of the world. The value of both imports and exports 



1 Twenty- live countries representing 99 per cent of European trade. 



— 191 — 

declined by less than three-tenths for Europe and by almost 
one-half for other continents. 



Table XXXIII. — The Change in the Direction of Exports 

of Certain Countries in 1930. 

(1929 = 100.) 



Europe 



North Rest of 
America World 



Totiil 



a s. a 

Canada 

Australia (years ending June 30th) 

Japan 

United Kingdom : 

(a) General .Exports .... 

fb) Special Exports 

Germany 



79 
76 
95 

87 

87 
89 
95 



70 
70 
90 
56 

72 
72 
70 



69 
66 
66 

77 

73 
75 
78 



73 
71 
86 
68 

78 
78 
89 



This table shows that Europe has been a better customer in 
1930 compared with the. preceding year than the rest of the world. 
The sales to Africa have also been fairly well maintained. One 
reason why European trade seems to have suffered less than 
that of other continents is that a comparatively large part or 
its population is employed in manufacturing industries, which 
were less severely hit by the decline in prices than industries 
producing foodstuffs aud raw Materials. The following table 
shows that the export value of ten countries exporting mainly 
manufactured goods had declined 37 per cent in the first quarter 
Of 1931, compared with the same period two years earlier, while 
it had dropped, in six non-European countries exporting vegetable 
foodstuffs and raw materials, as much as 52 per cent. The 
European exports of these cruder products maintained their 
export values much better, but the high figure in the table is 
partly due to the increase in the exports of Russia. If that 
country were excluded, it would be true that manufacturing 
countries would be found to have reduced their export values 
by a little more than one-third, and countries exporting primary 
products by almost one-half. Fundamentally different has been 
the position of countries exporting animal foodstuffs, as is seen 
from the fad thai- I lie exports of Denmark and the Irish Free 
Stale only declined by 6% per cent in value. 



— 192 — 

Table XXXIV. — Percentage Changes in the Value of Foreign 
Trade in Certain Groups of Countries. 





In per cent of correspond- 
ing half year in 1929 


First quarter 

of 1931 

in per cent of 

first quarter 

of 1929 




First half 
1930 


Second half 

1930 




Imp, 


Esp. 


Imp. 


Exp. 


Imp, 


Exp. 


1 . Ten countries exporting main- 
ly manufactured goods . . . 


88 


87 


77 


76 


66 


63 


2. Countries exporting mainly 
vegetable food and raw ma- 
terials : 














(a) Five European countries 

(b) Six countries in other con- 


97 


114 


87 


86 


82 


94 


tinents 

(c) Total of (a) and (b) . . 


81 
84 


72 
79 


66 
71 


63 
68 


61 
65 


48 
55 


3. Two European countries ex- 
porting mainly animal food . 


99 


100 


87 


89 


97 


94 



The movement of imports in these various groups of countries 
is shown on the table and need not be commented upon here. 
It is striking, however, that extra-European countries producing 
primary products reduced their imports much less than their 
exports, while the opposite was true of European countries of 
the same type. Importation of foreign commodities plays a 
more important role in the economic life of the former countries, 
in which a restriction of imports is therefore much more difficult 
to bring about. Further, these countries had a large supply of 
foreign exchange and gold which they were able to utilise to 
pay for a temporary excess of imports, while the European 
primary producers had to adjust their import values to the 
changed export conditions. 

Further analysis of the changes in trade as between different 
countries during 1930, compared with 1929, reveals the important 
fact that "trade between European manufacturing countries was 
very little affected by the. depression. The reduction in the 
foreign trade of European countries was thus almost exclusively 
due to the i'allmg-off in trade with other parts of the world. In 
1931 the situation, however, changed in this respect. 



— 193 



For a few countries, indices of the prices of goods entering 
into international trade are available, which makes it possible 
to compute roughly the quantum of their international trade. 
A study of this material shows that the quantum of imports in 
five manufacturing countries, taken as a whole — the United 
States, the United Kingdom, France, Germany and Czechoslo- 
vakia — declined by only about 6 per cent from 1929 to 1930 ; 
whereas the volume of their exports fell off by 13 per cent. 
This indicates that the terms on which international trade was 
carried on by these countries were changed considerably to their 
advantage. It must be kept in mind, however, that the magnitude 
of the variation in the terms of trade cannot be judged from 
such figures, owing to the fact that the net export of capital 
from this group of manufacturing countries was much reduced 
in 1930. Similar figures for cereal- and raw-material-producing 
countries are not available, but price data support the conclusion 
that the terms of trade of these countries moved in the opposite 
direction (see "Chapter VB). Furthermore, the fact that manu- 
facturing countries seem to have suffered much less than, others 
during 1930 has been partly due to the large and practically 
fixed interest payments which they received ; the decline of 
the price level naturally increased the real value of these payments. 
Table VII in the Appendix shows that in all countries for 
which quantum figures are available, with a few exceptions 
a reduction of the volume of imports and exports has taken 
place, Value figures have of course declined still more. The 
most notable exception is Russia, which will be discussed below. 
France increased the quantum of her imports ; New Zealand, 
Algeria, Latvia, and the Netherlands Indies their exports, 
while Denmark increased both exports aud imports. 

Countries which sell a large part of their commodities to 
Europe have fared better than those which export largely to 
other continents. For instance, the export value of the United 
States fell off by as much as 27 per cent ; in the United Kingdom, 
I lie value of exports declined by almost 22 per cent and its 
quantum by over 17 per cent, whereas the value of German 
exports fell only 10 per cent, and the quantum only 4 per cent. 
This would appear to have been partly due to the fact that 
Great Britain normally sends only about a third of her exports 
In Europe, while Germany sells three-quarters of hers to European 
countries. The fact that Germany maintained her exports at 
;i high level was also the outcome of other circumstances — in 
particular, the necessity for making reparation payments and 
meeting other fixed obligations abroad during a period when 
i lie Influx of foreign capital w;is reduced. This of course 
also affected imports into Germany, the quantum of which 



— 194 — 

declined 11 per cent or almost three times as much as that of 
the exports. As a result of these changes, Germany recorded an 
export surplus of about $224 million in 1930, as against an import 
surplus of $187 million in 1929 and $569 million in 1928. 

Not only Germany, but also certain other important borrow- 
ing countries have maintained their exports better than their 
imports. The Argentine, which has exported gold and reduced 
her foreign liquid assets instead of curtailing imports, affords 
a striking exception. 

For certain important manufacturing countries — Lhe United 
States, the United Kingdom, France and Germany — changes 
in the value and volume of trade in certain groups of commo- 
dities are shown in Tables VIII. -IX. in the Appendix and in 
Table XXXV. below. 

In all these countries, the value of the imports of raw materials 
declined much more than the value of imports of finished pro- 
ducts. In France, there was even a considerable increase in the 
value of imports of the latter group. Similarly, exports of manu- 
factured goods were better maintained than exports of raw 
materials, except in the case of Great Britain. 



Table XXXV. 



Percentage Changes in the Value and Quantum 
of Trade in 1930. 
(1929 = 100.) 





Imports 


Exports 




Value 


Quan [urn 


Value 


Quantum 


United States : 












64 





73 


— 


Semi-manufactures 


69 


— - 


70 


— 


Finished manufactures . . . 


76 





75 


— 


United Kingdom : 












74 


90 


81 


84 


Articles, wholly or partly 










manufactured 


93 


100 


77 


81 


France : 










Industrial materials .... 


83 


103 


79 


93 


Manufactured articles .... 


113 


i .. 5 


86 


86 


Germany : 










Raw and semi-manufactures . 


76 


91 


84 


93 


Manufactured articles .... 


79 


84 


92 


96 



— 195 — 

The quantum figures for the three European countries 
confirm the impression that their trade was relatively well 
maintained during 1930. That the exports of manufactured 
products from manufacturing countries kept up well is also seen 
from Table XXXVI. This table reveals the great difference 
between the ability of Europe and other parts of the world to 
purchase such commodities. Exports of Germany to Europe in 
1930 were nearly as large as in 1929 and larger than in 1928, 
while exports to other continents were about 25 per cent lower. 



Table XXXVI. — Index Number of the Value 

of Exports of Manufactured Products in 1929 and 1930, 

as Percentage of 1928. 





1929 


1930 




1929 


1930 


Germany* : 

To Europe . . 

To Non-Europe 

Total . . . 

United Kingdom 1 : 
Domestic Exp. . 
Re-exports . . 


112 
116 
113 

99 
111 


111 

86 
104 

76 
93 


United States 2 : 
Semi-manufact. . 
Finished . . . 

France 3 . . . . 

Belgium 4 ... 
Netherlands s . . 
Czechoslovakia 8 . 


102 
112 

98 

106 
108 
100 


72 
84 

85 

90 
92 

88 



Among the manufactured commodities, exports of producers' 
equipment seem to have kept up at least as well as those of 
consumers' goods. It should be observed, however, that before 
the war, there was a clear tendency towards increased trade in 
Hie former kind of commodities, a tendency which seems to 
have continued later. To judge the influence of the depression, 
il. is I here fore necessary to eliminate this trend. According 
to Professor Wagemaun, the exports of these two classes 
of commodities from Germany, the United Kingdom and the 



• Brussels classification ; including War Reparations in kind. 

' National classification, viz: " Aiiicles wholly or mainly manufactured 

Nal ional ciassi Meal ion. 
1 National group " Objets tabritiu&s ". 
1 Brussels ciassi lira I ion. 

'■ National group " r'ahrikalcu ", which is pracl ically Ihal Ol Brussels. 
" llrussrls ciassi lical ion. 






— 196 — 

United States moved in the manner indicated by the following 
table : 



Table XXXVII. — Changes in Exports of Producers'' 
and Consumers' Goods fin per cent). 1 



— 197 



Producers' Goods : 

Germany. . . . 
United Kingdom 
United States . 

Total . . 

Consumers' Goods : 
Germany. . . . 
United Kingdom 
United States . 

Total . . 



1910 
as com- 
pared Willi 

1900 



+ 102 

+ 57 
+ 56 



+ 72 



+ 38 
+ 55 

4- 74 



+ 51 



1913 

as euiii- 

pared with 

1910 



4- 46 

-f 28 
+ 66 



44 



+ 26 
+ 18 
■f 35 



H- 22 



1925 
as com- 
pared with 
1913 



- 35 

— 2 

-|- 49 



— 32 

+ 2 
+ 33 



1930 
as com- 
pared with 
1925 



+ 47 

9 

+ 9 



14 



+ 19 

— 39 

— 21 



22 



From 1925 to 1930, the value of exports of producers' goods 
increased by 14 per cent, while the value of exports of consumers' 
goods declined by 22 per cent. The boom period brought a relative 
increase in the importance of producers' goods in international 
trade. From 1929 to 1930, the reduction in the German exports 
of finished commodities belonging to these two classes seems, 
however, to have been almost the same. The high German 
exports of producers' equipment goods were partly due to large 
sales to France. Since the new tariff agreement between those 
two countries, German exports to France of electro-technical 
machinery have risen to twelve times the figure in 1927 and the 
exports of machines in general to eight times the figure for that 
year. 

The readjustment of the net trade balances — that is, the 
difference between imports and exports — of certain groups of 
countries, which has resulted from the changes in the conditions 



1 Source : Wagemann : " Struklur und Rhylhmus der W ellwirlsehajt ", Berlin 
1931, page 145. 



of international trade and in international capital and gold 
movements, are seen in Tables X-XI in the Appendix. In manu- 
facturing countries, practically no change took place from the 
second half of 1929 to the second half of 1930, or from the first 
quarter of 1929 to the first quarter of 1931. European countries 
exporting vegetable foodstuffs and raw materials appear to have 
adjusted their trade balance in the course of 1929 and to have 
continued to do so in 1930. Such countries in other continents, 
on the other hand, have in many cases changed their trade 
balance in a negative direction, in spite of the fact that 
long-term borrowing has been much restricted. (See next 
section.) 

It is impossible to enter here upon a description of the trade 
in individual commodities. It may, however, be mentioned 
that trade in coal seems to have been very little affected by the 
depression ; in the second half of 1930, it exceeded that in the 
corresponding period of 1928. World exports of motor-cars 
fell in 1930 by over 50 per cent, while production fell by less 
than 40 per cent. 

Russia is a notable exception to the general movement towards 
a reduction of both the quantity and value of international 
trade. The value of Russia's foreign trade increased by 16 per 
cent from 1929 to 1930 and, if quantum figures were available, 
Ihey would of course show a still greater rise. Export values 
increased by 13 per cent and import, values by 21 per cent. A 
comparison of the trade of Russia to-day and before the war is 
exceedingly difficult on account of territorial changes. It would 
seem that the foreign trade of the U. S. S. R. in 1930, although 
considerably larger than in preceding years, was still less than 
lliat of those parts of the Russian Empire comprised within 
I lie present Soviet Union before the war. In spite of a bumper 
crop in 1930, the exports of cereals would appear to have been 
smaller than before 1914. The timber exports, on the other hand, 
seem to have been somewhat larger. As the considerable and 
unexpected increase in the supply of certain important Russian 
Commodities in 1930 occurred during a period of depression, 
il naturally exercised a considerable influence on the movement 
of prices. On the other hand, the even greater increase in imports 
Of semi-manufactured and finished commodities must have 
exercised a stimulating influence on the industries which were 
able to sell to Russia. For example, the II. S. S. R. imported 
agricultural and other machinery to a value of 361 million 
roubles (ll.Sfi million ul gar ol' exchange) or more Hliau 
twice the figure for 1929. The imports of motor-ears, sliips, 
finished iron ami steel goods other than machinery, semi- 
mi Factored products of iron and steel and metals, also show 






— 198 — 

a considerable increase. It should be observed, however, that 
Russian imports of raw materials have been declining, a fact 
which has tended to intensify the slump in their prices on the 
world markets. 

During 1931, the tendencies in international trade which 
have been described above were considerably modified. The 
value of world trade continued to contract and in the iirst quarter 
of the year was 30 per cent less than in the corresponding period 
of last year. (See Tables XXXII and XXXIV above.) This 
was an even greater reduction than in the previous year. The 
chief difference, however, between 1931 and 1930 was a change 
in the relative position of the different countries. Manufac- 
turing countries reduced their exports at least as much as — in 
many cases more than — other countries. This was largely due 
to the fact that, while their trade with non-manufacturing 
countries continued to fall, there was a still greater drop in 
the trade between the different manufacturing countries, which 
had been well maintained during 1930. Further, it was the 
volume of trade in finished goods which declined most. How 
severe the reduction in the exports of manufactured products 
has been is shown in the following table for certain 
countries : 



Table XXXVIII. — Index Number of the Value of Exports of 
Manufactured products in the First Quarter of 1931, in Per- 
centages of the First Quarter of 1929. 



Germany : 

To Europe . . . 

To Non-Europe . 

Total . . 

United Kingdom : 
Domestic Exports 
Re-exports. . . . 



93 
61 
83 



54 
69 



United States : 

Semi-manufactured. . 48 

Finished 49 

France 72 

Belgium 85 

Netherlands 74 

Czechoslovakia 79 



This reduction of world trade could not but considerably 
influence conditions in the shipping industry. It has been men- 
tioned in Chapter II above that shipping rates ever since the 
war had tended to decline and were relatively low. The fact 
that, even during the summer of 1929, more than five per cent 
of total tonnage was laid up indicates that a considerable surplus 
existed. Under such conditions the reduced demand for cargo 



— 199 — 

space, which accompanied the decline in world trade, naturally 
depressed rates, as is shown in the following table : 



Table XXXIX. 



Index Numbers of Ocean Freight Rates. 
(1913 = 100.) 





Economist 


Statist 


Statistisches 
Reichsamt 


1 iJ^t f • ;* f • ■ • • r * t 


110 


119 


106 


1928 . 


99 


110 


102 


1929 


97 


106 


109 


1930 


79 


82 


92 


1931 K . . . 


81 


85 


88 2 



The fall from the 1928 level was, however, rather smaller 
than that for most commodity prices. Computations of a general 
index vary considerably and show a reduction of from 10 to 16 
per cent. The further reduction in 1931 has been insignificant. 

The downward tendency of shipping rates has of course been 
strengthened by the fact that shipbuilding continued on a large 
scale throughout 1930 ; it has, however, fallen off considerably 
during 1931 . The total world gross tonnage exceeded 70,000,000 
tons in June 1931, or 3,000,000 more than in the same month of 
1929, while it was about 47,000,000 tons in 1913. 

That shipping rates declined so relatively little in spite of 
this increase in supply in a period of falling demand would appear 
to be chiefly due to the fact that the rates were already not much 
above the variable costs of many old ships. Hence, even a small 
reduction has made it unprofitable to keep them in commission. 
The tonnage not in use in the spring of 1931 was about 18 per cent 
Of the total. 

It should be added that certain rates have not participated 
in the general decline. On important routes the companies 
Which control the liner traffic agreed to maintain almost the 
same rates as before the depression, both for passengers and for 
many classes of goods, and very little changes were made before 
I lie summer of 1931. This fact, however, although it has tended 
I o restrict the trade in some commodities on these routes, has 
been of relatively little importance compared with the reduction 
in the rales ruling in the tramp traffic. 



I'M si h;ill' nl' I he year. 

Jiinuni'3 1.0 April. 



200 — 



E. International Capital Movements. 

Outline of Recent Changes. 

In a previous section, a summary was made of the movements 
of international capital which took place after the war until 
the middle of 1928. Attention was drawn to the gradual increase 
in the volume of capital transfers — particularly to the growth 
in European borrowing at the time of the monetary stabilisation 

— and to the return to more normal political conditions in 
certain countries in 1924-25. 

Temporary disturbances in the latter part of 1925 and in 
1926 checked capital transfers to a certain extent. From 1927, 
French capital exports began to fall off and change in a way 
which, it would appear, affected most directly the credit situation 
in Germany. Nevertheless, capital movements in 1927 and 1928 
were very considerable. In each of these years the aggregate 
net capital export from the three largest capital-exporting 
countries — the United States, the United Kindgom and France 

— amounted to between $1,500 million and $2,000 million 
and the capital imports of Germany are believed to have exceeded 
$1,000 million. 

By the middle of 1928 there were signs of a general contrac- 
tion in international capital operations. The foreign issues 
floated in the United States fell from the exceptionally high 
figure of $842 million in the first half of that year to $409 million 
in the second. This reduction was, however, partly offset by 
exports of short-term capital ; for, during the second half of 
the year, the foreign borrowers were able to draw upon their 
deposits in American banks, consisting largely of the proceeds 
of loans previously floated. The turn in the net capital exports 
of the United States on long- and short-term account only came 
in the beginning of 1929. During that year they fell to 
$233 million or to less than one-fourth of those in 1928. 

For the United Kingdom no direct estimate of the capital 
movement is available, but the surplus on account of current 
items and Government capital transactions in the official balance 
of payments estimate amounted to $667 million in 1928 and 
$672 million in 1929 1 , If this estimate be correct, private capital 
exports were as great or even slightly greater than in 1928. 
The amount of new capital issues for foreign account fell, however, 
by over a third and the outflow of capital in other forms than 
new long-term loans would thus appear to have increased. 
French capital exports, which were still considerable in 1928, 
were practically wiped out in 1929. 



Preliminary figure, 



— 201 — 

The restriction of capital movements is of course equally 
noticeable in the figures for borrowing countries. German 
net borrowings are estimated to have fallen off in 1929 by $450 
million or nearly 44 per cent ; similar reductions took place in 
the case of a number of other countries. 

The following table summarises the available information 
concerning the net capital movement in the years 1928 and 1929 
for a number of countries, lenders as well as borrowers. Capital 
exports are indicated with a (+) sign and imports with a ( — ) 
sign. For certain of the countries, these figures, which comprise 
both long- and short-term capital, are not based on direct 
evidence of the capital transactions but are calculated from 
the. balance of current commercial transactions. 



Table XL — International Capital Movements, 1928 and 1929. 

$ (000,000's) 

1928 11)29 

Lending countries : 

Canada * + 164 — 87 

Czechoslovak!;' + 53 +31 

France 1 3 + 235 — 29 

United Kingdom 1 2 + 667 + 672 

United States of America .... + 1,036 + 233 

Sweden * + 19 +71 

Borrowing countries : 

Argentine 4 — 131 — 38 

Australia * 5 — 193 — 166 

Denmark — + 9 

Dutch East Indies + 8 — 32 

Finland 1 — 40 — 12 

Germany 1 — 1,0,17 — 567 

Hungary 88 — 37 

India 16 — 67 — 36 

Japan 54 +25 

New Zealand ] ° + 5 — 54 

Norway — 34 — 8 

Poland — 140 —58 

Yugoslavia — 26 + 8 



1 Indirect estimates, calculated on the basis of figures relating to merchandise, 
gold arid services. 

■■ The. figures exclude Government capital transactions. 

• The figures exclude amortisation of lulcr-Allied debts- 
' Economic, years ending September .'{01 li. 

* Krnnnmir veins ending June 30lh. 

" I'j'oiiomlr \ciii". beginning April 1st. 






— 202 — 

In a number of cases the capital balances were reversed in 
1929. Thus, three of the borrowing countries shown in the above 
table (Yugoslavia, Denmark and Japan) recorded a net capital 
export in that year. Regular amortisation payments and repay- 
ments of short-term credits tend, it should be remembered, to 
create a capital export from debtor countries if new borrowings 
are curtailed. 

Canada, which had been exporting capital during the period 
1923-1928, imported capital in 1929. The chief reasons for 
this change were the drop of over 46 per cent in the Canadian 
wheat crop in 1929 as a result of which the export surplus of 
Canada was reduced, and the exceptional demand for capital 
in the country, created partly by the industrial boom, partly 
by the storing up of a portion of the rich crop of 1928 by the 
Wheat Pool. The capital balance of the Dutch East Indies 
was also reversed in 1929, when there was a capital import into 
the country of some $30 million, due in part to the adverse 
effect upon the trade balance of the falling prices of the main 
products of the country. 

New Zealand normally borrows, but, in the economic years 
beginning April 1st, 1927 and 1928, there appears to have been 
a small capital export from that country. The resumption of 
capital imports in the following year (April 1st, 1929-March 31st, 
1930) was connected with the fall in the prices of wool and 
other exports. The inflow of capital was exclusively in the form 
of sales of domestic holdings of outstanding foreign securities 
and short-term funds ; no long-term loans are recorded. 

Unlike most lending countries, Sweden records an unusually 
high capital export in 1929 — higher, indeed, than in 1927, 
when the previous post-war record was reached. In 1928, the 
capital outflow was curtailed, probably largely under the influence 
of labour disputes in the main exporting industries. 

The countries shown in the table, other than those mentioned 
above, record a drop in 1929. Czechoslovak capital exports 
fell by 42 per cent, Argentine capital imports by 71 per cent, 
Australian capital imports by 14 per cent, Indian capital imports 
by 46 per cent and Polish, Hungarian, Norwegian and Finnish 
capital imports by 59, 58, 76 and 70 per cent respectively. For 
a number of countries, no figures concerning the capital move- 
ment are available ; but the conclusions which may be drawn 
from the movement of the visible trade balance and other factors 
confirm the view that the restriction in international credit 
was almost universal. 

As mentioned above, the change in the capital market was 
noticeable in certain countries by the middle of 1928 or more 
than a year before the turn of the business cycle. A further 



— 203 — 

contraction would appear to have taken place in the summer 
of 1929 and to have been one of the factors which led to the 
spread of the crisis in the autumn of the same year. 

Capital movements after the turn of the business cycle in 
1929 are onlv incompletely known. The net export of capital 
from the United Kingdom, which in 1929 had remained at 
practically the same level as in preceding years, was considerably 
reduced in 1930. The surplus on account of current items and 
Government transactions, according to an official estimate, fell 
from $672 million in 1929 to $190 million. The United Slates 
capital exports, which in 1929 had fallen to less than one-fourth 
of those of the preceding year, or $233 million, is estimated 
to have risen to §547 million 1 . Other countries repurchased 
a large quantity of their securities. Hence, the net export 
of long-term capital was only $213 million, the rest being an 
outflow of liquid funds. 

Fiance appears to have withdrawn large amounts of her shorl- 
term investments abroad in 1930 and, judging from the visible 
trade figures, il may be assumed that there was an inward capital 
balance. From being one of the most, important capital-exporting 
countries of the world, France, in Die coarse of two or three years 
seems to have become, an importer of capital. The change was 
accompanied by a steady increase in French gold imports. 
Switzerland, according to an authoritative statement a , received 
more capital from abroad in 1930 than she invested there. The 
change in the Swiss balance would seem to be connected with 
the inflow of short-term funds from Germany and other countries 
and was due — in spite of the exceptional decline in money 
rates in Switzerland — to a desire to avoid high taxation or 
risks elsewhere. Belgian and Swedish capital exports appear to 
have contracted in 1930. 

The German inward capital balance, which in 1929 had 
fallen off considerably, was furl her heavily reduced in 1930. 
In the first half of the year, the inflow seems to have been consi- 
derable — about $150 million — ■ but late in the summer the 
confidence of foreign capitalists was shaken and a large outflow 
of liquid funds began. This led to a reduction of the foreign 



I 



1 The official estimate made by the Department of Commerce is 8733 million. 
Iiul from Lhis ligure has been subtracted a sum on account of amortisation of 
war debts, I. He net change in merchandise credits and some other minor items 
which are not considered as capital ilcins in the official balance of payments 
estimate. 11 does not seem improbable thai Hie figure S547 million is too high, 
as l He credit items on the balance of payments fall short of the debit Hems by as 
much as |374 million. If il is assumed thai the mi exporl of capital was really 
lower i him tin- oiiiciai figure, Mm debits and credits would more nearly balance, 

Ui'|imi of Professor (1, llai'liiuaim, President of Hie Hoard of Ihrcrtuys ,,| 

iiu- Swiss National Bnxik, to iin- Assembly of the Umil; mm March 7th, 1031. 



— 204 — 

exchange reserves, while long-term borrowing continued; 
the net movement of capital in the second half of the 
year seems to have fallen to an insignificant sum. For the 
whole year the net foreign borrowing is estimated at $170 
million or not much more than a third of the German 
reparation payments. These payments were rendered possible 
by a surplus of commodity exports over imports of $370 million. 

The information available concerning trade in merchandise 
and gold suggests a similar fall in the capital imports of Poland 
and Hungary. Canada, which began to borrow in 1929, seems to 
have increased its capital imports considerably in 1930. Japan's 
balance of payments changed in the opposite direction : after 
having imported capital steadily up to 1928, it recorded a small 
net export in 1929, which probably increased greatly in 1930. 

The tendencies towards a contraction in the international 
capital movements other than reparation payments and in some 
cases towards a reversal in the direction of the net movement 
of capita], which had become evident during the boom of 1928-29, 
were thus on the whole intensified in 1930. Some observations 
on the short-term capital movements will be made in Chapter VIII. 
Towards the end of 1930, Germany had a net indebtedness on 
short-term account of about $1,400 million. Fluctuations in this 
sum exercised a dominating influence on the German economic 
position in the summer of 1931. 

The above statements refer to the total capital balances 
and are, to a certain extent, contradicted by the information 
available concerning the movement of new capital issues floated 
for foreign account in the main lending countries. There was a 
growth in such issues in the last months of 1929 and the first 
half of 1930, and during this period the flow of capital from 
lending to borrowing countries in certain other forms probably 
increased also. Later in the latter year, however, capital move- 
ments again contracted as a result of certain economic and 
political factors and it appears that the tendencies of the last 
half-year outweighed those of the first. 

In 1931, the long-term capital movements seem to have 
continued to decline, but detailed figures arc not available. 
France granted considerable loans to agricultural countries 
in South-Eastern Europe. 



Analysis of New Capital Issues. 

In studying the movement of new capital issues, it should 
be remembered that, although over a longer period they may 
be of more significance for the future capital balance of the 
countries concerned than, for example, purchases and sales of 



— 205 — 

outstanding securities or lendings and borrowings on short term, 
which normally offset each other to a large extent, this may 
not be true of a shorter period. Impressions from a study of 
such issues must therefore be corroborated or completed by 
other data showing the changes in the capital market, particularly 
the movement of effective bond yields and money rates in 
different countries. 

The United Slates capital issues for foreign account cul- 
minated in 1927. In this year they amounted, according to the 
Department of Commerce, to $1,337 million, or about double the 
corresponding figure for issues in the United Kingdom, 1ml Ihey 
fell to $1,251 million in 192S and $671 million in 1929. This con- 
traction in United States lending abroad in 1928 and 1929 
coincided with the New York Stock Exchange boom. 

In the second quarter of 1928, as the boom gathered strength, 
bond yields began to rise, and continued to do so until the autumn 
of 1929. The consequence was an increase in the actual interest 
rate necessary to induce lenders to take up issues of fixed-interest 
securities, and this increase, though small, was sufficient to 
discourage such issues in the United States. Foreign Governments 
to a large extent turned to other capital markets where conditions, 
all hough affected by those prevailing in the United States or 
by local booms, were generally less unfavourable. In other 
eases, these Governments were able, to meet their requirements 
for current expenditure or for refunding of matured loans by 
short-term banking advances, thus avoiding the flotation of 
new bonded loans or at least postponing it in anticipation of 
more favourable conditions on the market. 

Table XLI. — United States, Capital issues 
for Foreign Account. 1 

$ (000,000's) 

Bonds and notes : 1927 1928 1929 1930 

(a) Government and munici- 
pal loans 827 586 121 548 

(b) Industrial bonds and notes 699 625 473 419 

Shares : 

(a) Preference shares .... 17 40 114 13 

(b) Ordinary shares .... 18 69 51 29 

Total 1,561 1,320 759 1,009 

1 Scries <>!' Uhtj Commercial and Financial Chronicle. Tlic figures show nominal 
values and exclude refunding operations. 



* 



— 203 — 

The Stock Exchange speculation favoured the issues of 
foreign shares in the United States, but, although Lhe volume 
of such issues was five times as great in 1929 as in 1927, it was 
still relatively unimportant — representing only 22 per cent 
of the total issues for foreign account. A more substantial growth 
in foreign issues in the United States was prevented " by the 
reluctance of foreign managements to see corporate control 
pass to another country and by the traditional unwillingness 
of American investors to purchase stocks of foreign corporations " 1 . 
The demand for a relatively high degree of security when subs- 
cribing for foreign securities may account for the fact that the 
volume of foreign preference shares rose more rapidly Lhan 
that of ordinary shares, while the reverse is true of the share 
issues for domestic account. 

When share speculation came to an end in the last quarter 
of 1929, capital was again released for bond issues and the total 
issues for foreign account rose rapidly up to the middle of 1930. 
During the last half of that year, they again fell to a low point. 

The cause of this new decline was no doubt partly the aggra- 
vated economic conditions in a number of borrowing countries 
suffering from the low prices of their export products and other 
repercussions of the crisis and partly political complications in 
different parts of the world which themselves resulted from or 
were intensified by the economic depression. 

The distribution of the United States capital issues for 
foreign account reveals certain facts of particular interest. 
Available funds were largely attracted, not by countries which 
normally require foreign credits, but by those with a rich domestic 
capital supply. Similarly, loans to a number of the most im- 
portant borrowing countries in other continents were reduced. 
The course of events may best be illustrated by the fact that, while 
issues for the account of Canada and Sweden, which are as a 
rule capital-exporting countries, rose from $194 million in 1928 
to $354 million in 1929 or from 16 to 53 per cent of the total of 
American issues, those for the account of six large borrowers 
— namely, Germany, Japan, Australia, the Argentine, Brazil 
and Colombia — fell from $570 million to $52 million, or from 
46 to 8 per cent of the total. 

The movement of capital from the United States to Germany 
has all through the period under review been closely connected 
with the political situation of the latter country. The contraction 
of American capital exports in 1928 coincided with a strong 
movement in Germany for a definite settlement of the reparation 



1 American Underwriting of 1'oreiyn Securities in 1929. 
Bulletin, No. 688). page 0.' 



(Trade Information 



— 207 — 

problem ; in September 1928, an agreement was reached by 
which the creditor Powers recognised the necessity for such a 
settlement. Negotiations started at the beginning of 1929 and 
continued throughout the year. The final agreement was not 
reached until January 1930, or a few months after the definite 
turn of the business cycle had taken place. The uncertainty 
with regard to the result of the negotiations during this consi- 
derable period tended to check loans to Germany as well as to 
certain other European countries. 

With the expansion of foreign financing in the United States 
during the first half of 1930, a number of countries which during 
the boom period had been largely shut out of the New York 
capital market were again able to borrow there. Considerable 
amounts were raised during the second quarter by Germany, 
Argentine, Brazil and Japan. When the volume of issues for 
foreign account again fell off in the middle of the year, these 
countries were once more virtually excluded and the only country 
which continued borrowing freely in New York was Canada, 
in spite of the relatively low yield offered by Canadian bonds. 
In the last quarter of the year, Canada was practically Lhe only 
foreign borrower. 

It is not necessary to analyse in detail the capital issues in 
international capital markets in Europe. The major charges 
are summarised in the following table, showing the changes 
in the volume of issues for domestic and foreign account and the 
foreign issues as percentage of total issues in the United Kingdom, 
the Netherlands and Switzerland, together with corresponding 
figures for the United States. (See Table XLII.) 

British lending in the form of new capital issues for foreign 
account has recently been less affected than that of the United 
States by temporary political complications or business fluc- 
tuations. This is shown by Chart 30. A number of coun- 
tries which could not borrow in the United States during 
I he boom period of 1928-29 were able to satisfy their most urgent 
requirements in the United Kingdom. Thus Germany increased 
her borrowings in London from £2 million in the first half of 
1928 lo £5.9 million in the second half. Since the middle of 
1 929, she has not, however, borrowed in this market. Similarly, 
in lhe last quarter of 1930, when the United States loans were 
con lined lo Canada, the United Kingdom lent large amounts 
lo such countries as India and the Argentine. 

For Italy detailed figures arc available J which show a large 
ivducl ion of lhe issues of Italian loans abroad in 1929-30 compared 
with lhe preceding years. The amounts were, excluding issues 



Itiini.i COrrtiTiei'cialli ll:ili:m:i : Muni mciiln h'.ainiimiiii llaliiinn. Mil;m<>, Ml.'ll. 






— 208 — 

Chart 30. 

Foreign Issues as Percentages of Total Issues in the U. S. A. 

AND U. K. 





50 


























QQYAUM£ UM 
i/MTFQ MHGDOM 








40 
























30 
























20 






























er/irs C/v/s dam. 

U.S.A. 








10 





























1 1 


1 1 1 




1 1 




1 


III 


IV VI VII IX X 


XII 1 III IV VI Vli IX X 


XII 1 


lit IV VI VII IX X 


XII 




1928 


1929 




1930 

S.da/ fr/a S09 



for refunding purposes : 1927 $162 million, 1928 $50 million, 
1929 $10 million, 1930 $11 million. The issues of foreign loans 
in Italy, on the other hand, increased from $3 million in 1928 
to $11 million in 1929 and $15 million in 1930. These figures 
refer only to loans. As a number of Italian shares were introduced 
on foreign stock exchanges in 1928 and 1929, it seems certain 
that Italy had a net import of long-term capital in 1929 and 1930 
also. As it seems probable that Italy invested on short term 
abroad in 1927 and has later reduced her deposits abroad, it is 
doubtful to what extent the net import of capital was reduced. 



Table XLII. 



209 — 



Domestic and Foreign Issues in Certain Countries 
1928-1930. 





$ (000,000's) 




i im 


1929 


1930 


United States : 

Domestic issues 

Foreign issues 

Foreign as percentage of total . 
United Kingdom : 

Domestic issues 

Foreign issues 

Foreign as percentage of total . 

Netherlands : 

Domestic and colonial issues . 
Foreign issues 

Foreign as percentage of total . 

Switzerland : 

Domestic issues 

Foreign as percentage of total . 


6,795 
1,320 

16.3 

1,066 
698 

39.6 

131 
107 

45.0 

57 
18 

24.0 


9,425 
759 

7.4 

776 
459 

37.2 

96 
45 

32.1 

131 
21 
13.9 


6,029 
1,009 

14.3 

620 
534 

46.1 

123 
103 

46.5 

61 
60 

49.6 



The Price of Capital. 

Reference has been made above in Chapter I to the narrowing 
of I lie margin between the price of capital in borrowing and leading 
countries which took place during the period of extensive capital 
movements. This movement came to an end in most countries 
in the middle of 1928 and in Germany and Austria about one 
year earlier. 

The changes in bond yields in a few countries from the begin- 
ning of 1928 onwards is shown in Chart 31. As the yield 
figures for different countries employed for the diagram are not 
comparable, the diagram does not illustrate the relative credit of 
the different countries, but only the changes in the price of long- 
term capital and the growing spread between yields. 



— 210 — 

Chart 31. 

Actual Percentage ^ ield of Certain Bonds or Group of Bonds 

1928-1931. 



■■r-i 



>¥ 




1 I I L.I,.., 1 . 



■I IV 1 V VP It IX X XI <U I I 1 If V VI VII VII IX X XI XI I II III IV V VI VII W IX X XI XJ ! ! Ill IV t VI VII 
I92fl 1929 1930 1931 



A ;■ .'■■--- ■ ~'Z 



Brazil : 5 per cent funding, 1914. 

France : Miscellaneous bonds. 

Germany : Miscellaneous bonds, 8 per cent and less. 

Italy : Rentes 3 % per cent. 

Poland : Government Bonds. 

Roumania : Government Bonds. 

Switzerland : Railway Bonds 3 % per cent. 

United Kingdom : Consols, 2% per cent. 

U. S. A. : (i() miscellaneous hiK'i-Krade bonds. 



— 211 — 

From the middle of 1928 to the end of 1929 yields were rising, 
but less rapidly in lending than in borrowing countries (see Chapter 
V — C). French yields indeed fell slightly. The discrepancy 
between the yield of bonds of borrowing and lending countries 
thus increased. 

The increase in the supply of capital available for investment 
in bonds after the slump late in 1929 did not entirely reverse 
the situation. It is true that bond yields in certain borrowing 
countries fell and approached the slowly declining yields in lending 
countries, but in a number of cases (for example Poland and 
Roumania) they remained far above the level ruling one year 
earlier. Moreover, during the latter half of 1930 there was an 
almost universal increase in the yield of the bonds of borrowing 
countries, while that of the bonds of most lending countries was 
si able or declined slightly. In the first half of 1931, the margin 
between the yields first declined and then rose considerably under 
I lie influence of waning confidence in the position of important 
borrowing countries. 



The Equilibrium of the Balances of Payment. 



In view of the considerable and rapid changes in the volum- 
;iik1 value of commodity imports and exports from many coun 
I ries, as well as in international capital transactions, the question 
arises how the equilibrium of the balances of payments was 
maintained. When imports of capital fell off, countries exporting 
primary products were compelled to adjust their trade balance 
to I he new situation, using their reserves of foreign exchange 
.iml gold as a cushion to take the first shock. This readjustment 
of trade encountered great difficulties, as the greater decline 
in I he export prices of these countries and the relatively inelastic 
demand for their goods abroad reduced export values and turned 
:ni export into an import surplus. 

The effect of the disturbances in the capital markets during 

I lie boom period of 1928-29 in causing important changes in the 
trade balance of several countries is very evident. The capital- 
exporting countries used a larger proportion of their capital 
for investment at home. This tended to increase imports and 
reduce exports — e.g., of machinery. Imports of machinery 
rii:.i' iii 1929 in I he United Kingdom by 14 per cent, in France 
l>v !>9 per renl and in Belgium by 38 per cent. In most of the 
borrowing countries of Europe, on the oilier hand, the effect 
mi h;idc \v;is the reverse. Willi I he tightening of credit in Ihe 

inn idle of 1929 the I rude balance of Germany and a number 
ui nihil borrowing countries in Europe changed simultaneously 

I I inn p.'iv.i vr I ii a.Cl I vr. 



— 212 



Table XLIII. 



- Net Trade Balance 1928-1930. 1 
$ (000,000's) 





192S 


1929 


193(1 




Jan.- June 


July-Dec. 


Jan. -June July-Dec. 


Jan.- June 


July- Dec. 


Germany 2 . 


— 324 


— 81 


— 69 


+ 81 


+ 120 


+ 191 


Lithuania . 


— 2 


— 1 


— 


+ 3 


— 


— 1 


Poland . . . 


— 63 


— 33 


— 48 


+ 15 


+ 9 


+ 1 


Hungary- 


— 35 


— 29 


— 25 


4- 21 


+ 8 


+ 6 


Yugoslavia . 


— 20 


— 5 


— 13 


+ 18 


2 


— 1 


Roumania . 


— 23 


r- 9 


— 24 


-f 18 


+ 6 


+ 33 



Certain of these countries are large exporters of agricultural 
products ; their exports in the second half of each year naturally 
exceed those in the first. The rich crops in 1928 and 1929, and 
particularly the bumper maize crops in Yugoslavia and Roumania 
in the latter year, contributed to the active trade balance. In 
Germany, Poland and Hungary, a reduction of imports and an 
increase in the exports of industrial raw materials and manu- 
factures was, however, essential for the change. 

The rich harvests, so valuable to these countries at the mo- 
ment when the credit crisis became acute, were only one of the 
factors involved in the adjustment of their balance of accounts. 
In most of them there was a contraction in the domestic demand 
for consumption goods in 1929. In Germany, Poland and Hungary 
there was also a reduction in the imports of machinery. As the 
table shows, most of the above countries maintained an active 
trade balance in 1930. The increase of the excess of exports 
over imports in Germany in 1930 was partly due to the fact that 
German export prices fell much less than import prices. 

The trade of the most important borrowing countries in con- 
tinents other than Europe did not react in the same way to the cre- 
dit stringency. Their trade balance became more passive or less 
active in 1929. Thus the Argentine excess of exports fell from 
$210 million in 1928 to $64 million in 1929, thai of India from 
$395 million to $263 million and that of the Netherlands Indies 
from $232 million to $138 million ; in Australia, the excess of 



1 Merchandise only. 

2 Excluding reparation deliveries in kind. 



— 213 — 

imports rose from $10 million in 1928 to $106 million in 1929 
and in Egypt, where there had been an excess of exports of 
$27 million in 1928, there was an excess of imports of $14 mil- 
lion in 1929. 

Variations in crops and prices are to some extent res- 
ponsible for these changes. In 1928, the value of the exports 
of the countries in question was larger than usual, owing to 
rich crops and fairly high prices, particularly of raw textiles. 
In 1929, crops were lower and prices and the value of exports 
falling. 

At the same time, however, imports of industrial products 
rose. It appears surprising at first sight that these countries 
could find means to increase their purchases from abroad in 
spite of the credit stringency. In certain cases the balance was 
settled in gold ; thus the Argentine, which had imported gold 
on a large scale in the two preceding years, and Australia exported 
considerable amounts of gold. Certain countries — amongst 
them Australia — drew upon their balances in London or New 
York and others were able to raise short-term credits. Neverthe- 
less, the difficulties experienced in meeting the foreign obliga- 
tions became more serious in the course of the year. Some 
countries, among them, as has already been stated, the Argentine 
and Australia, departed from the gold standard. It was only 
in 1930 that the trade balance of the non-European countries 
exporting primary products was adjusted through a reduction 
iii. imports. Nevertheless a few of them had to follow the example 
Of the countries mentioned above and depart from the gold 
Standard. 



Summary. 



The history of international capital movements during the 
I : i s I lew years, as illustrated in the preceding pages, may be 
divided into four distinct periods. 

The prosperity prevailing in the United States and a number 
of olhcr countries during the first of these periods, comprising 
I lie year 1927 and the first few months of 1928, was favourable 
In international credit transactions. The volume of long-term 
International loans reached a record level and a diminution of 
I he discrepancy between money rates and bond yields as between 
different markets took place. A number of borrowing countries 

particularly those which had recently stabilised their curren- 
cies employed pari; of the funds raised abroad for the reconsti- 
tu I ion of I heir gold reserves and were tlnis able to extend their 
domestic credit supply. On the whole, a marked movement 
in i he direction of greater economic stability look place. There 



— 214 — 

were, however, certain exceptions to this rule. The capital 
market in Germany, in spite of the heavy capital imports into 
that country, was tightening when elsewhere credit was becoming 
easier. 

The second period coincides with the United States boom 
proper, beginning during the second quarter of 1928 and ending 
with the third quarter of 1929. Its main characteristic is the 
rapid decrease in United States long-term lending abroad and 
the movement of short-term funds to New York, where high 
money rates prevailed. Capital exports from most other lending 
countries were adversely affected by local booms and as a portion 
of their reduced capital exports was attracted by New York, 
loans to most of the borrowing countries were curtailed. Political 
factors further prevented capital from flowing to certain of 
these countries. As a consequence, the spread between the yields 
of bonds of different origin increased. In settling annual interest 
and amortisation obligations contracted during the preceding 
period of easy credit, a number of borrowing countries were obliged 
to reduce their demand for consumption and capital goods and 
to adjust their trade balance or to export gold. The resulting 
disturbance in price relations and trade movements was one of 
the main factors which led to the worldwide crisis in the last 
quarter of 1929. 

The third period is relatively short — it comprises the last 
quarter of 1929 and the first half of 1930. The short-term capital 
attracted by the United States boom was withdrawn (the with- 
drawals had indeed begun even before the Stock Exchange 
collapse and may have had some influence in bringing it about), 
money rates fell and the discrepancy between rates in different 
countries were reduced. The reparation question was settled, 
a certain optimism was spreading and international capital 
markets were again opened to the main borrowing countries. 
There were thus certain signs of a return to the relative stability 
of the period preceding the boom. 

But the fall in the prices of primary products continued 
unchecked and soon the credit of a number of borrowing countries, 
whose exports consist mainly of these products, was shaken. 
Moreover, pessimism deepened when the seasonal increase of 
production had come to an end in the early summer of 1930. 
A new contraction of capital movements thus took place. This 
marks the beginning of the fourth period which, at the time of 
writing, one. year later, has not yet come to an end. Creditors 
have become unwilling to grant further loans. The weight of 
the existing debt charges of debtor countries has increased 
considerably through the decline in price levels. The export 
values of countries which are largely dependent on the sale of 



— 215 — 

primary products have dropped to a low level. Thus, a heavy 
strain has been imposed on the balance of payments and on the 
{.old reserves of these countries, and gold has been accumulating 
h the United States and France. The price of short-term and 
long-term capital has fallen in the lending, and increased m the 
borrowing countries. . . 

The aggravation of the depression and the growth in unem- 
nlovment has tended at the same time to increase public expen- 
diture and to reduce public income and has thus created great 
financial difficulties and shaken the credit of those Governments 
and countries which are most in need of foreign capital, Social 
and political complications in 1931, to a large extent the natural 
outcome of the depression, have had a similar effect and liayt 
even led to a flight of capital from countries which needed it 
to those which did not. Thus the increase, in the spread between 
money rales seems to a large extent to be due to a growing 
sense of political insecurity. A general feeling oi insecurity and 
instability has been prevalent and has formed the main obstacle 
in the way of a resumption of international credit transactions 
on a large scale. 



Chapter VI. 

FURTHER ANALYSIS OF THE DEPRESSION. 



A. The Character of the Depression. 

The essential characteristic of the present world economic 
depression is that a business-cycle recession occurred at a moment 
when structural changes and maladjustments had made the 
economic situation very unstable. The different aspects of this 
instability have been dealt with in Chapters I C and II above 
and need not all be touched upon again. It is, however, important 

ll\l™ P - + S T-rJ ial Cei ." tain tendencies which had contributed 
to this instability persisted after the beginning of the depression. 
1 he adaptations for which these tendencies called were not carried 
out, partly because the depression checked the incentive to 
invest new capital even for the purpose of adapting production 
to changing needs ; partly because tariffs were generally increased, 
inus, tor example, an extraordinary increase in import duties 
on cereals and other measures designed to protect domestic 
prices tended to maintain the existing forms of agricultural 
production. In the United Slates, Canada and many other 
countries, tariffs on manufactured goods were also raised 

In such a situation, where maladjustments and instability were 
tending rather to grow than to diminish, a business-cycle recession 
set in. this recession was especially violent in the United States 
where the preceding boom had been very pronounced. In other 
countries, where no real boom conditions had prevailed, it looked 
at tot as if the recession would be relatively mild. However, 
the unstable world economic position which had in some wavs 
already been seriously shaken by the boom, was further disturbed 
by the recession. Hence the depressing tendencies increased 
in strength and number and gradually affected one country 






— 217 — 

after another. These tendencies were the combined result of 
the business-cycle recession in certain countries, the instability 
existing in 1928 and 1929 and the tendencies towards growing 
structural maladjustments noticeable in the same period. 

The actions and reactions of the various factors mentioned 
above need to be analysed a little further. The business recession 
in 1929, like all previous movements of a similar character, 
involved a reduction in the demand for raw materials and a 
decline in their prices. This decline was more rapid than it 
would otherwise have been, owing to the tendencies towards 
over-production, the weakness of many of the existing mono- 
polistic agreements and other circumstances which have been 
described in Chapter II B. For countries which concentrate 
on the production and export of raw materials, this price move- 
ment was of course a serious matter. The situation was aggrava- 
ted by the fact that the price of crude foodstuffs also fell as a 
result of an over-production of certain products such as wheat 
which was to some extent of a purely accidental character. 
Owing to the inelastic demand for foodstuffs, a very small excess 
production is likely to bring about a considerable drop in prices. 
The important factor in the movement of the prices of staple 
foodstuffs in the short run was, however, not the inelasticity 
of consumers' demand, but the rapid contraction of the demand 
from merchants, whose stocks were falling in value. Owing 
to the slow decline of retail food prices and the relatively inelastic 
demand from consumers, the consumption did not to any 
considerable extent counteract the drop in prices caused by 
the contraction of the demand from dealers. On the contrary, 
I he reduction in incomes would appear to have brought 
about a reduction in the demand for some of the more expensive 
foodstuffs. The drop in food prices was aggravated by the absence 
of any restriction of output. The individual farmer is unable, 
by a reduction of his output, to influence the prices at which 
lie sells. Hence, contrary to the policy pursued by manufacturers, 
he naturally tries to meet falling prices by producing more 
rather than by producing less. The frequent increase of import 
dii I ies on foodstuffs in most food-importing countries strengthened 
I his tendency to maintain and increase supply, and thus contri- 
buted to I he drop in price on the world market. Further, for 
special reasons, the world supply of wheat increased irrespective 
of the movement of prices. 

II is quite possible that the prices of foodstuffs as a whole 
mi girl have declined very Little or only for a brief period had 
I here been no general business depression. II is true that demand 
for mosi vegetable Foodstuffs is relatively Inelastic and thai 
therefore a tendency tow&vds over ■"production would in any case 



* 



218 



have brought about a considerable temporary slump in prices. 
As a decline in cereal prices, however, leads directly to a cheapen- 
ing of animal foodstuffs, the demand for the latter would have 
grown. Moreover, people who are accustomed to spend a certain 
amount on food will buy more animal foodstuffs, when they get 
their usual supplies of bread and other vegetable foods at lower 
cost. Hence a comparatively small shift from cereals to dairy 
farming might have been sufficient almost to restore cereal 
prices to the old relation to other prices without rendering dairy 
farming unprofitable. It may be, however, that profitable food 
prices could have been obtained only by a reduction in total 
agricultural production, brought about, possibly, by the trans- 
ference of part of the farming population to manufacturing 
industries. As the economic depression made such transfers 
and shifts almost impossible, and as it further restricted the 
demand for certain foodstuffs, a severe drop in food prices 
was inevitable. 

This simultaneous decline in the prices of raw materials and 
important crude foodstuffs could not but make the situation of 
countries largely dependent on the production and the export 
of such commodities very difficult. The value of their exports, 
which had been fairly well maintained up to the autumn of 
1929, was subject to a sudden and heavy reduction, as explained 
in Chapter V D. 

Such a sudden disturbance -of international economic relations 
inevitably exercised a profound influence on conditions else- 
where. Unfortunately, a disturbance of another land tended 
to have very much the same effect, and the combined influence 
oi the two proved disastrous. This second disturbing factor was 
the sudden change in international capita] movements. The 
world had adjusted itself to a continuous and, on the whole, 
a fairly steady movement of capital from certain wealthy coun- 
tries to others, in Europe and elsewhere. Both these groups of 
countries had developed their production m accordance with the 
conditions of demand which resulted from this flow of capital. 
In some of the borrowing countries, the inflow of foreign capital 
had been particularly large in 1927 and 1928 and had led to 
a boom in construction and other branches of economic activity. 
By the end of 1928 and in the first nine months of 1929, this 
situation was radically changed as a result, of the American 
boom, France also restricted her net exports of capital, and total 
mternational capital movements declined substantially. For a 
time, however, debtor countries were able to make use of 
the considerable floating assets which they had accumulated 
abroad, and their trade balances were at first relatively little 
disturbed. The situation changed in the autumn of 1929 and 



219 — 



still more in the beginning of 1930, when the American export 
of capital, after a temporary increase, again fell off. There seems 
to have been no increase in French lending, and the state of 
the balance of payments of the United Kingdom compelled a 
reduction in British lending abroad ; thus, the net total inter- 
national movement of capital dropped to only a fraction of 
its normal proportions from the spring of 1930 onwards. 

About the same time the full effects of the drop in the prices 
of primary products on the trade balance of several important 
borrowing countries which were large producers of raw materials 
and crude-food products made themselves felt. The pressure 
on the balance of payments of these countries consequently 
became intense. A severe credit reduction became necessary 
and the value of imports declined. Further, the investment 
activity in these countries, so largely dependent on an inflow 
of foreign capital, fell to very small proportions. Largely as a 
result of these conditions, considerable quantities of staple 
commodities were thrown upon the market, thus intensifying 
the drop in their prices. 

But it was only after the summer of 1930 that the full effects 
of these changes in international capital movements on the 
economic life of countries dependent on primary industries 
made themselves felt. This fact confirms the experience that 
a brief interruption of long-term lending is not necessarily dan- 
gerous, as debtor countries can draw for a time upon reserves 
of foreign exchange and may be able to borrow on short term. 
A prolonged reduction of long-term lending, on the other hand, 
involves very serious consequences. History gives numerous 
examples of cases in which such changes in capital movements 
accompanied by a decline of export values have made it impos- 
sible for borrowing nations to keep their foreign exchange 
rates stable. Countries in which this happened recently were 
in most cases particularly sensitive owing to the existence of 
large foreign debts, involving a fixed charge in gold. Further, 
a lax financial policy during the boom period had in many 
cases seriously affected the State finances of these countries, 
as of many others. 

Largely as a result of economic and financial difficulties, 
conditions became unstable in. a number of countries. The 
credit of such countries, in many cases already impaired by the 
decline in their export prices, further deteriorated. Confidence 
in I heir general stability was shaken ; long-term borrowing was 
rendered almost impossible and short-term borrowing extremely 
difficult. 

The effect of I hese developments on. the lending nations 
and other iiiaiinfacl ui'in^ countries was also serious. Their 



220 — 



exports of manufactures to the impoverished countries depen- 
dent on primary products declined heavily and employment 
in their export industries fell off. To some extent this fall 
in their export trade was due to the increased duties and other 
impediments to the import of foodstuffs which they had them- 
selves imposed. This policy, which restricted the world market 
for these commodities, tended to depress their prices and thus 
to reduce the purchasing power of food-producing countries. 
The exports of manufacturing countries were naturally affected 
thereby and, owing to the losses involved, the volume of savings 
and both the ability and the willingness to lend abroad were 
reduced. Under these conditions, the chances of profit from 
new investment became small and the volume of new investment 
tended to decline. A striking characteristic of this interaction 
of international economic relations is that it tended to reduce 
the value of investment in lending and borrowing countries 
alike. As will be further explained in the next section, this 
has been one of the most important factors in driving down 
prices in the last two years. 

It was of course not only the trade between these groups 
of countries that was disturbed. The change in the relative 
prices of primary products and manufactured commodities 
also involved a dislocation of the domestic trade between different 
groups of producers. This was an important aspect of the second 
year of depression practically everywhere. As shown above, 
the decline in the purchasing power of the fanning population 
was relatively small in 1929 ; in 1930, however, the situation 
was fundamentally changed and in most countries monetary 
purchasing power was reduced to about two-thirds of what 
it had been in 1928. According to an estimate bv the United 
States Department of Agriculture, this happened"' also in the 
United States. The total value of the crops, on the basis of 
prices ruling on December 1st, was $8,600 million in 1928 and 
$S,700 million in 1929, and fell to $6,300 million in 1930. 
Although such figures do not give an exact measure of the 
changes in the purchasing power of farmers, they serve to show 
that their ability to buy commodities from other industries had 
been severely curtailed. 

Such a disturbance in the exchange of commodities between 
different groups of producers is, however, probably rather less 
serious when these producers live in the same country ; the 
distress is less localised and the credit mechanism less violently 
disturbed. However, as the domestic exciiange of commodities 
between farmers and other classes of society has been of great 
importance in almost all countries, the consequences of this 
disturbance have been tremendous. 



— 221 — 

The effects of reduced borrowings made themselves felt 
also in European borrowing countries, such as Germany, that 
export chiefly manufactured commodities. But the strain on 
the balance of payments in such cases has been less severe, 
up to 1931 at any rate, as the value of their exports has been 
much better maintained. Borrowing on short term, ultimately 
for the purpose of meeting the service of foreign debts, combined 
in many cases with unemployment and social and political 
unrest, led to a further loss of confidence abroad. Short-term 
borrowing became increasingly difficult, and at critical times 
sudden withdrawals of foreign and domestic liquid funds took 
place. The drop in prices, although it has affected export values 
less than import values, has nevertheless aggravated the situation 
in these countries. 

The lack of confidence both within and between the various 
countries is, to a very large extent, both an effect and a cause 
of the unfavourable economic conditions. That the primary 
explanation of the depression cannot be psychological may be 
seen, for instance, from the fact that in the United States and 
elsewhere both business conditions and international credit 
transactions were stimulated by the optimism prevailing in the 
first months of 1930. Pessimism returned only when funda- 
mental economic tendencies towards a deepening of the depres- 
sion made themselves felt. Pessimism has of course also been 
due to political and social difficulties, but even these are partly 
the result of the economic and financial disturbances. 

The existence of surplus capacity and instability in manufac- 
turing industries and in shipping has exercised an influence on 
the world economic situation similar to that exercised by the 
instability in primary industries and in international financial 
relations. These factors have been partly responsible for the 
sudden curtailment of new investments, after the beginning of 
the depression, and the low level at which investment, has since 
remained : they have thus tended to aggravate the depression. 
It is not improbable, however, that the extraordinary severity 
ol' the present depression is to a larger extent due to the factors 
mentioned above than to the maladjustments in manufacturing 
industries which were described in Chapter II. 

Another factor which has also tended to keep down invest- 
ment activity is the general feeling of uncertainty created by 
Die rise of import duties. In Europe, contrary to a common 
impression, duties on manufactures have been kept on the whole 
relatively stable, although the real weight of specific duties 
lias grown as prices have declined : tint in important non-Euru- 
pean countries increases in tariffs on such goods have been both 
large. and numerous. The lack ol' balance in international price 



— 222 — 

relations has also created difficulties in certain countries — for 
instance, Great Britain. In the United States, the wide use of 
instalment selling during the boom has probably had some 
depressing effect on sales of expensive and durable goods in the 
last two years. Conditions in India and China have also in general 
reacted unfavourably on the world economic position. It is not 
necessary, however, to mention once again these various factors, 
which have been examined in Chapters II and V. The way in 
which they have affected the present depression is clear enough. 
Like the other factors discussed in this chapter, they have served 
to intensify a business-cycle recession which would have occurred 
in any case, although it would otherwise have been less 
worldwide in character and might have been chiefly confined 
to the United States and some other countries in which the 
ground had been prepared by a boom. 



B. Monetary Factors and the Decline of the Wholesale 
Price Level, 1929-1931. 

State of the Capital Markets. 

In the analysis of the character of the depression in the 
preceding section, one aspect of the problem has been left out 
of account. A change in the distribution of purchasing power 
as between borrowing and lending nations or countries producing 
primary goods and manufacturing countries does not necessarily 
lead to a fall in the general wholesale price levels of commodities ; 
nor does partial over-production, as a rule, lead to a general 
decline of price levels. If the purchasing power of one country 
is reduced, and its demand falls off, other countries will have 
more purchasing power and their demand may rise. If too 
much of one commodity is produced, its price will of course 
drop but, as less money is then used to buy this commodity, 
more money is available for the purchase of other commodities 
and their prices will tend to rise. That this happens in many 
cases is amply proved by experience. For instance, in the 
last two decades before the war, rapid technical progress and 
severe maladjustments occurred in many fields, with the result 
that the prices of a large number of commodities were falling ; 
the general price level was nevertheless rising. Indeed, if the 
total of used purchasing power x in terms of money remains 



1 This Lerm is used as synonymous with " total amount oC purchases of com- 
modities and services ". 



, 



— 223 — 

constant, the price level 1 can drop only in proportion to an 
increase in the total supply of all commodities and services. 
A fall in price beyond this point is dependent on a redaction 
in total purchasing power used. Such a reduction often accom- 
panies severe maladjustments of a structural or business cycle 
character. It must therefore be ascertained under what condi- 
tions this reduction occurs and under what conditions purchasing 
power is maintained and used — in other words, what is the 
relation between the maladjustments in industry and trade 
and the lack of balance in the monetary system which takes 
the form of a decline in the total of used purchasing power and 
a drop in commodity prices. 

The turn of the business cycle, for whatever reasons it was 
caused, brought a reduction in the volume of investment in 
manufacturing countries. In borrowing countries, the fall 
in the influx of capital had already led to a restriction of invest- 
ments. Further, when the stock exchanges had broken, share- 
holders lost money and many of them were forced to use a part 
of their incomes to cover these losses. The reduced value of 
shares for use as collateral served to restrict the volume of new 
loans ; loans in the United States on securities by persons or 
institutions other than banks fell off substantially. Thus the 
contraction of the volume of credit, although it did not at first 
lake the form of reduced bank credit, involved a contraction of 
purchasing power and the wholesale price level tended to fall. 

When the conditions of the capital market are balanced, 
the circulating capital which is made available in the process 
Of production (for instance, amounts written off for depreciation 
Of fixed assets) is again invested in production. In addition, 
that part of net income which is saved — i.e., which is not 
used to purchase consumers' goods — goes to buy producers' 
goods : in other words, is used for real investment. Whenever 
total investment is too small — whenever the whole of available 
Circulating capital and new savings are not used for actual 
i lives I men! — the total demand for commodities must necessarily 
Tail shorl of the total value of output at previous prices and the 
wholesale price level tends to drop. 

Once the sharp decline of prices set in, such tendencies 
were aggravated by a " bnyers' strike ". Business-men decided 
to postpone purchases until a later date, with Die result that 
available money was not used but temporarily kept on deposit. 
The balance between savings and investment in the capital 
markel was also disturbed by Hie fact thai falling prices and a 

1 Tile price level is line assumed In he measured liy an index mimlier where 
I he \vri|'lil\ mi ri':.|iciiiil In I li>' i|u:inl il ies pi ixlueeil. 



— 224 — 

realisation of the existence of profound maladjustments mode 
the prospects for new fixed investments in many eases un- 
promising. Thus the demand for capital was still further 
reduced. As the depression proceeded, the existence of surplus 
capacity, which had been concealed by the previous boom, 
became evident in many industries, and the demand for further 
investments fell off rapidly. 

Thus a lack of balance between available circulating capital 
plus new savings on the one hand and investments on the other 
caused the wholesale price level to move downwards. The 
reduction in purchasing power was reflected not so much in a 
reduction in note-circulation, or volume of bank credit which 
underwent only small changes, as in a reduced velocity of 
circulation. The exact manner in which the monetary mechanism 
worked is indeed of little consequence in the present connection. 
What matters is that the total purchasing power and its use 
was heavily reduced by the factors mentioned above. Great 
caution should be used in judging the significance of the small 
changes in the total volume of loans and investment by banks. 
At certain times credit transactions outside the banks play a 
large role. Further, bank credit may be used for other purposes 
than the purchase of commodities and services — e. g,, securities. 
It is only the purchasing power used for the former purpose 
which has a direct influence on the price level \ Thirdly, as 
already indicated, the velocity of circulation may vary. It 
is also important that, once the depression had started, a 
considerable part of the outstanding bank advances became 
frozen, and in many cases banks financed new losses sustained 
by their clients in order to prevent them from becoming bankrupt. 
It is quite possible that credits used for this purpose may have 
had no influence on the demand for commodities and thus have 
exercised no check on the fall in prices. 

As demand for capital declined, interest rates naturally 
fell considerably (see Chapter VC above). Reductions in discount 
rates were accompanied by reductions in the open market rates. 
However, this cheapening of credit failed to stimulate demand 
to any considerable extent. 

It will be observed that the decline in long-term money 
rates which are of fundamental importance for fixed investment 
was comparatively slow and insignificant in extent. From the 
third quarter of 1929 to the last quarter of 1930, they only 
fell by about a third of 1 per cent in the United States and the 
United Kingdom, by less than half of 1 per cent in Switzerland, 
but by almost 1 per cent in France. One reason why the decline 






1 Compare footnote on page 223. 



— 225 — 

was so small is probably that investors had for many years 
been used to considerably higher returns on their capital than 
before the war and had come to regard this high level as natural 
and normal. Hence they were averse from accepting a lower 
yield and preferred to keep their money on short term in expec- 
tation of some more promising future opening. In the second 
place, the depression itself and the uncertain political conditions 
in a number of countries created a widespread feeling of pessimism. 
Money which would ordinarily have been invested directly in 
industry — e.g., through the purchases of shares or bonds — 
was left on deposit. It is true that the total volume of deposits 
was in most countries changed very little, but there was a relative 
increase in time deposits in commercial banks in most countries. 
Thus, demand deposits which serve as circulating media were 
reduced as the volume of trading and the price level declined. 

The unwillingness of many capitalists to lend their money 
for investments at existing interest rates was of course also 
due to their feeling that conditions were insecure and risks 
great. A similar attitude on the part of entrepreneurs made 
them unwilling to borrow at existing rates for new investments. 
Thus investment declined. 

Conditions of course varied widely from country to country. 
In some there had been a very great over-expansion during the 
boom period and the surplus capacity in certain industries was 
considerable. In others boom conditions had scarcely been 
experienced and an effective large investment demand — e.g., 
for electrification and building — still existed when the depression 
had started. In such countries, demand for capital for new 
investment was naturally better maintained than in those in 
which considerable surplus capacity existed, purchasing power 
contracted far less and the depression was less severe. 

The demand for capital for real investment is of course 
always subject to a considerable reduction when a business 
recession has started. But certain forms of investment have 
in some cases continued — e.g., road building, construction and 
electrification. Unfortunately, during the preceding years, the 
developments on these lines had been so great in a number of 
countries such, for instance, as the United States, that the 
potential demand, once the depression had started, was relatively 
small. In other countries, the reduction of long-term borrowing 
abroad brought about a sudden contraction of new investment 
in these branches. The consequent rapid reduction of total 
investment is one factor which seems to be partly responsible 
for the disequilibrium on the capital market and the heavy 
decline in prices as well as for the failure of any tendency to 
increased investment to appear in 1931. 



226 — 



In order to check the decline in the volume of credit and 
bring down the long-term interest rates, Central Banks did not 
confine themselves to reducing discount rates. Certain of them 
and many commercial banks, invested directly in bonds, thus 
putting money at the disposal of business and easing the money 
markets. From October 1929 to March 1930, the Federal Reserve 
Banks increased their holdings of United States securities by 
$386 million. After the latter date, the increase was, however, 
relatively unimportant. 

The demand of borrowing countries for foreign capital was 
to a greater or lesser extent prevented from making itself felt 
on the capital markets of lending countries. Thus, to the 
reduction of the domestic demand for capital in the latter was 
added a reduction in the use of capital abroad. The result was 
that the disequilibrium of the capital markets was further accen- 
tuated and the decline in prices was aggravated. 

One other aspect of international finance should be mentioned 
in this connection. Just as within individual countries the 
preference for keeping money in a liquid form — e.g., bank 
deposits — instead of investing it has had a deflationary effect, 
so the growing tendency to keep large liquid claims on the 
leading money markets has strengthened the tendencies to a 
drop in prices. This remains true, even though a policy aimed 
at increasing gold reserves instead might have had similar or 
even worse effects. 

The fundamental causes, then, which have brought about the 
decline of the wholesale price level are obviously those which 
made for general instability and for sudden and considerable 
changes in the volume of investment, international capital 
movement, the exchange between manufacturing countries and 
other countries, etc. It was their effects which upset the equili- 
brium on the capital market \ The monetary system has proved 
unable to adjust itself to these changes and to maintain balance 
through sufficient reductions in interest rates, the purchases of 
bonds by central banks, etc. This is no new development. A 
business recession always brings some disturbance of the balance, 
but it has been extremely severe on this occasion owing to severity 
of the underlying fluctuations. In so far as these phenomena lay 
outside the monetary system, the causes of the price decline 
may be said to be due to non-monetary factors. On the other 
hand, it is conceivable that a greater flexibility in the mone- 
tary system could have kept the disequilibrium on the capital 



1 In the Memorandum prepared for the French National Economic Council by 
Professor Rist (Journal Officiel, June 30lh, 1931) a different interpretation ol" 
these events is given. 



— 227 — 

market within narrow proportions and thus mitigated the 
decline of the price level. This, however, is a question on 
which competent authorities disagree. 

The issue round which discussion has centred is Lo a large 
extent not whether the drop in prices is due to monetary and 
credit factors or production and trade factors, but to what 
extent the former could have been adjusted to the changes in 
the latter. 

Gold Movements and Their Influence on Credit Policy. 

There has been much discussion whether, and to what extent, 
the failure of the banking system to stimulate investment 
through more liberal credit policy was due to an insufficient gold 
supply or to a maldistribution of gold as between the different 
countries. 

In Chapter II E it was pointed out that, in 1928, the surplus 
of gold over and above legal requirements was considerable, but 
that the larger part of that gold was to be found in the United 
States. In 1929, both France and the United States, under 
the negative influence of reduced net export of capital, continued 
to import large sums of gold, as seen from the following table. 
In the United States, the tendency was interrupted in Octo- 
ber and November, but early in 1930 a new period of gold 
imports began. 

Table I. — Net Movements of Gold in Certain Countries. J 

Gold net imports (+) or net exports ( — ) balance 

$ (000,000' s) 



Year 


U.S.A. 


U.K. 


France 


Ger- 


Argen- 


Urazil 


Aus- 


Japan 


and quarter 








main 


tine 




tralia 




1929 I . 


+ 98 


— 7 


+ 2 


+ 3 


— 21 


+ 2 


— 6 


_ 


II . 


+ 77 


+ 17 


+ 132 


— 212 


— 58 


— 


— 1 


— 


Ill . 


+ 71 


\—U3 


+ 92 


+ 84 


— 29 


+ 1 


— 12 


— 


IV . 


7(1 


+ 59 


+ 111 


-|- 20 


— 60 


— 1 


— 37 


— 


1930 1 . 


| 120 


+ 56 


+ 38 


+ 57 


— 1 


— 24 


— 71 


— 88 


II . 


|- 103 


+ 5 


+ 42 


32 


— 


— 37 


— 14 


— 23 


Ill . 


37 


11 


+ 156 


5 


— 1 


— 25 


— 30 


— 12 


IV . 


1 94 


27 


+ 224 


84 


— 23 


— 50 


— 2 


- 26 



1 ' ,< m u <c : Memorandum mi International Trade and Balances of Payments, 
I''. 1 ./ in'.',!!, Vyl. II. 



— 228 — 

The French import of gold continued with only a brief inter- 
ruption in the spring of 1930. From the United Kingdom, on 
the other hand, where capital exports were maintained at a 
high figure, large quantities of gold left in the middle of 1929. 
Between October 1929 and April 1930 there was, however, a 
net inflow of gold. 

The large German borrowings during the years 1926-1928 
were accompanied by gold imports culminating in the second 
half of 1928 with the withdrawal of funds raised in the first 
half-year. A temporary weakness of the Reichsmark at ■.com- 
panied by heavy gold exports occurred in April 1929, when the 
success of the reparation negotiations was endangered, and again 
in the autumn of 1930 as a result of internal political complies [Tons 
Except in these months, the Reichsmark exchange was steady 
and gold entered the country. 

Other borrowing countries m Europe have not recorded large 
gold movemen ts. A number of such eoun tries in other continents, 
on the other band, were compelled to export gold, in some cases 
to such an extent that their gold reserves were greatly depleted. 
Several have, as already mentioned, gone off the gold standard. 
The Argentine gold imports, after the restoration of the gold 
standard in the autumn of 1927, came to an end in the middle 
of 1928, when the gold peso went to a discount. The discount 
rose in 1929 and heavy gold exports took place. With the 
closing of the Conversion Office in December, gold exports 
were discontinued and the currency depreciated. The fluc- 
tuations of the milreis exchange have roughly corresponded 
with those of the peso ; but there was no considerable outward 
movement of gold from Brazil until 1930. The Brazilian currency, 
it should be remembered, has not been on a true gold basis 
during any part of the period under review. Australia went 
off the effective gold standard early in 1930. In Japan, the 
embargo on gold exports was lifted in January 1930. Heavy 
gold exports immediately took place and continued during the 
greater part of the year, while the yen recovered steadily in 
value. The increase in the gold stock of the Bank of England 
in 1930 came largely from these countries, which had to give 
up the gold standard or a policy of stable foreign exchange. 
As a result of these movements, the gold in excess of legal 
requirements was still more concentrated to the United States 
and France. The position in the summer of 1931 is seen in the 
following table : 







— 229 — 

Table II. — Surplus 1 Gold in Certain Countries. 
(In millions of dollars.) 

June 1930 June 1931 

Argentine 65 

Australia 71 

France 520 831 

Germany 292 34 

Spain 146 57 

United Kingdom 269 336 

U. S. A 1,967 2,245 

Total 3,330 

These changes in the distribution are of course the outcome 
of the changes in the balance of payments, themselves largely 
due to the contraction of capital movements and the inelasticity 
of the demand for a number of the crude products of agricultural 
and raw-material-exporting countries, which prevented the 
quantity of their goods purchased from increasing as prices 
fell. The consequent gold movements have necessarily limited 
the freedom of action of all Central Banks possessing little gold 
in excess of minimum requirements. A more liberal credit 
policy than that which has been actually pursued by Central 
Banks with little excess gold would have been possible only if 
the balances of payments in their countries had been in a different 
position — e.g., if other countries had been able to increase their 
net capital exports or to let in more commodities from abroad. 
The gold situation and the limits it has imposed on credit policy 
is only an expression of the fundamental factors which govern 
the balances of payments. It may be added, however, that, 
in the opinion of some writers, had the available supplies of 
gold been larger than was actually the case, the influence of 
strains on the balances of payments and consequent gold 
movements in the last two years might have been attenuated. 

In this connection, the following passage from the second 
interim report of the Gold Delegation of the Financial Committee 
of I lie. League of Nations is of special interest : 

..." There is a growing risk of disturbance by fluctua- 
I ions in the invisible items of the balance of international 
payments, while the inelasticity of the visible trade is increased, 
mil only by barriers of one kind or another impeding the 

' '1,'lift 1 1- 1 iii surplus is here used in I. he .same special sense as in Chapter II 
i.ti., I lie surplus over I lit absolute legal minimum required. In fact of course 
nmr '.in | il 1 1 . mii',1 :il\\.i\. In' iiiaiiila'mril 







— 230 — 

international exchange of goods and services, but also by 
the inelasticity of wages. There has thus been a tendency 
m recent years for gold movements to be caused rather by 
such movements of funds than by normal changes in the 
volume of exports and imports. Capital can only be trans- 
ferred in the form of goods or gold or claims to existing 
wealth, and when capital transfers are made with such 
rapidity as to allow insufficient time for their ultimate effect 
on the volume of the imports or exports of goods to make 
itself felt, a disequilibrium of the total balance or payments 
is likely to be caused which will give rise to gold movements 
What is necessary for the normal working of the gold standard 
is that there should be a smooth flow from country to country 
alike of goods, services and securities, Onlv then can short- 
term capital perform its proper function of allowing temporary 
accommodation in such a way as to lessen and not occasion 
gold transfers. 

" The sensitiveness of liquid capital, however, has been 
due not so much to its magnitude as to the unstable economic 
and political conditions to which we made allusion in our 
introductory remarks. There has been an inevitable flight 
of capital from countries in which currencies have been 
inflated and a repatriation after stabilisation was achieved. 
Capital has moved on account of political uneasiness from 
those parts of the world where the need for it was greatest 
to countries where there was already an excess of funds. 
It has been attracted not simply by the real needs of business, 
but by chance of quick profits from Stock Exchange specu- 
lation. Simultaneously, the normal flow of goods has been 
impeded by sudden changes in Customs tariffs, by the impo- 
sition of prohibitions, and by the innumerable measures 
which Governments (or industrial combines) have taken to 
shelter domestic markets against external competition. " 

Was there a Secular Downward Trend of Prices after the War ? 

The sequence of events described above has been variously 
interpreted. Certain well-known economists believe that the 
drop m wholesale prices in the course of the last two years has 
become so violent partly because the tendency towards a declining 
price level, which always characterises a business depression 
has been strengthened by a long downward trend of prices 
In their opinion, the world has, since the war, been on the down- 
ward grade of a long-price trend of the same kind as that which 
lasted from the middle of the 'fifties to the middle of the 'nineties 
m the last century. 



231 



From about 1875 to 1895 there was an almost unbroken 
downward trend which had been preceded by and was followed 
by an equally pronounced upward swing. The existence of 
such long-wave movements of prices is of course beyond discussion, 
although authorities disagree as to their causes. The most 
common explanation of the fluctuations which took place between 
the middle of last century and 1913 is that they were related to 
changes in gold supply and the influence of those changes on 
the volume of credit. 

The decline of the wholesale price level from 1920 to 1931 
has been even greater than that towards the end of last century. 
However, the fact that prices have now reached a much lower 
level than eleven years ago does not prove that there has been 
a downward trend as the result of factors at work during the 
whole period. The price level may have dropped for different 
reasons immediately after the war and during the present 
depression, while none of the factors then at work were operative 
in the intermediate period. If that is the case, then the account 
given above of the causes of the price movement in the last two 
years need not be supplemented by reference to forces making 
for a long-time downward trend. 

Owing to the complexity of the influences at work, it is 
indeed difficult to prove that the actual course of prices during 
the years 1920-1922 was determined by forces other than those 
which naturally arose from the liquidation of war economy and of 
immediate post-war extravagances. During the seven following 
years there was, as already described, only a very small decline in 
prices, which reflected the rapidly rising productivity of industry. 
Though technical progress continued after 1929, it can obviously 
not have been a large factor in the much greater and more rapid 
drop in prices during the present depression. Thus it is difficult 
to isolate forces working during the whole post-war period and 
causing a long downward price wave, forces which could partly 
explain the development of the last two years. 

Certain economists lean towards the view that the failure of 
prices to rise during the boom is responsible for a part of the 
present decline. In other words, had prices been on a higher 
level in 1928, it is argued that they would not have come down 
lo quite so low in 1931. On the other hand, it must not be 
overlooked that a rise in prices up to the summer of 1929 might 
have greatly intensified the business boom, and have set up 
Such severe maladjustments in industry, particularly with regard 
lo new investment, that the following depression would have 
been even more serious. Thus, the tendency towards falling 
prices might have been strengthened and prices might have 
declined even lower than they have actually done. 



— 232 — 



It is important to note these various arguments. Where 
the truth lies it is probably not possible to ascertain to-day 
because the relatively short period since the termination of the 
war has been so much affected by temporary and exceptional 
forces of quite unusual power. 



C. Recession Tendencies in Different Countries. 

In previous chapters scattered remarks have been made 
regarding the situation in different countries during various 
stages of the depression. It may be convenient to deal with 
this question here in a more direct manner. 

It is important to bear in mind that different parts of a 
single country may be as variously affected as different countries. 
Conditions in agricultural districts differ markedly from those 
in manufacturing regions in the same country, and many 
manufacturing districts are much harder hit than others for 
a variety of reasons. For instance, the industries in northern 
England and Scotland, which are more dependent on external 
markets, have suffered much more than the industries in 
southern England, which work largely for the home market. 
The existence of important differences of this kind within the 
individual countries considered should be kept in mind in the 
following discussion. 

It is unfortunately, impossible to measure directly the 
relative severity of the depression in various countries — - iny 
instance, by figures for the percentage reduction of the national 
income — as direct data of this kind are not available. It is only 
possible to draw somewhat tentative conclusions from informa- 
tion regarding production, trade, prices, unemployment, etc. 

From a study of past periods of economic fluctuations it 
would appear that, the more violent the upward swing of the 
cyclical wave, the steeper and deeper the subsequent downward 
tendency. This phenomenon has also been observed in the 
period under consideration. In countries which enjoyed a 
pronounced boom hi 192K and 1929, a relatively severe slump 
has since been experienced. The maladjustments set up during 
the years of rapid expansion have been more serious than 
elsewhere and have called for subsequent liquidation and 
adaptation of a more profound character. This is certainly 
one reason why [he slump in the United States has been so rapid 
and severe. It is possible that the development in Germany 
from the re-organisation of the currency in 1924 up to the end' 
of 1927, which was characterised by 'rising wages and retail 



233 — 



prices and by a rapid rationalisation and increase of productive 
capacity in manufacturing industries, also produced a lack 
of balance which called for subsequent adjustment, although 
the liquidation period was somewhat delayed by the good 
business conditions abroad in 1928 and the first half of 1929. 
On the other hand in Great Britain and many other countries, 
the absence of real boom tendencies during the last years before 
the depression partly explain why the percentage reduction in 
industrial activity and in consumption has been comparatively 
slight. It should be observed, however, that a small reduction 
under such circumstances may involve a depression as severe 
as in another country, in which the reduction from an excep- 
tionally high boom level has been much greater. 

The character of the basic industries of a country largely 
determines the nature of the depression in that country. 
Industries producing primary products, either crude foodstuffs 
or industrial raw materials, have been specially hard hit and, 
hence, countries in which they play a large role have suffered 
more than others. Abundant evidence has been given above 
Lo show that they have been far more seriously affected than 
manufacturing countries. It is true that the majority of the 
latter have much more unemployment, but for several reasons 
it is impossible to judge the relative severity of the depression 
in different countries from unemployment figures, even if they 
were much more complete and reliable than they are. 

For instance, in two countries which have suffered a similar 
reduction in the demand for their manufactured products, 
unemployment may be very different if the mobility of labour 
is greater in one than in the other. In some countries, for 
instance Japan and certain South-Eastern European countries, 
unemployed industrial workers have to a large extent returned 

10 the farms and, although then. - addition to the output, of 
agricultural products is probably small, they do not appear 
in I he unemployment statistics. Secondly, a reduction of 
farm incomes to half the previous level, which has taken place 
in sonic cereal-exporting countries, is more serious than an 
increase of len lo twenty per cent in the unemployment among 
workers in manufacturing industries, even though from a 
sociological poinl Of view the existence of widespread unem- 
ployment is one of I lie most tragic aspects of the present situation. 

11 would indeed be a serious mistake to treat the present 
depression as only, or even principally, an unemployment 

CI ISIS. 

The leriiis on which countries producing primary products 
and manufacturing nations exchange their products have, as 
shown above, moved very much lo I he advantage of Hie latter. 






— 234 — 

This can be regarded as further evidence that they have suffered 
less. 

The different primary industries and the different manufactur- 
ing industries have of course been very variously affected, as 
has been indicated above in some detail. Rubber, wool, hides, 
wheat and coffee have dropped much more in price than other 
important primary products. This is one reason why British 
Malaya, Java, Australia, the Argentine, Canada and Brazil 
belong to the group of countries which have been specially hard 
hit in the last two years. Similar differences exist between the 
various semi-manufactured and finished commodities. Countries 
which are much dependent on the export of cotton and wool 
textiles have suffered more than those with a large export of 
electrical equipment, pulp and paper. It is also noticeable that 
animal-exporting countries, such as Denmark, the Irish Free 
State and New Zealand, have been in a relatively favoured 
position, at all events up to the beginning of 1931, owing to the 
fact that until that time the percentage decline in the prices 
of animal foodstuffs was no greater than that of maize and 
oilcake. 

Some economists attach great importance to a consideration 
of a third type. It is natural, they argue, that countries in which 
a balance between the different industries exists — for instance 
between agriculture and manufactures — are able to resist 
better than others the disturbing effects of a worldwide depression. 
In so general a form the validity of this statement is doubtful. 
It is difficult to see how one relationship between the various 
industries should be more natural or ensure greater stability 
than another. Obviously, however, countries depending only 
on one or a small number of industries suffer to an exceptional 
degree if their industry or industries happen to be severely 
depressed. Such has been the case of a great number of countries 
hi Latin America and Africa. On the other hand, conditions 
have been favourable in certain countries with specialised indus- 
tries which have been relatively little affected. The majority 
of European States have a varied economic life. Such countries 
have reached a degree of self-sufficiency as a result of which 
disturbances in the outside world, acting on their foreign trade, 
affect them relatively little. During the present depression, 
the prices of commodities entering into international trade have 
in general fallen considerably more than have those of goods 
produced for the home market only. Hence countries for which 
foreign trade is of great importance, such as Great Britain and 
most extra-European countries with a specialised type of 
industry, felt the effects of the slump more quickly and more 
acutely than most others. For Japan, the sale of silk to the United 



— 235 — 

States is of very great importance. As a result of the huge 
growth in consumption in the latter country during the last 
decade, the output in Japan was doubled and was expanding 
rapidly when the depression suddenly cut down the American 
demand. As the Japanese farmers could not readily reduce 
their output, prices dropped very low with grave consequences 
for the whole economy of the country. On the other hand, 
France, for instance, where foreign trade plays a relatively 
small role, has long been very little affected by the disturbances 
in economic conditions elsewhere. 

The following table shows the percentage reductions of 
the value of exports in 1930 compared with 1929 in the ten 
countries in which the greatest reduction has been recorded. » 
They are all countries which have suffered severely from the 
depression, to a large extent certainly as a result of the fall 
in the foreign demand for their export goods. On the other 
hand, most of the countries which have reduced their export 
values by only 10-15 per cent have fared relatively well. 

Table III. — Percentage Reduction of the Value of Export Trade 
in Certain Countries. 2 
(from 1929 to 1930.) 

Country Fal1 in 7. 

Chile 3 — 42.1 

Egypt ~ 38-5 

Argentine — oo.o 

Japan — 31.9 

Union of South Africa — 30.7 

Brazil 4 ■ • ■ — 30.6 

British Malaya 4 — 28 . 9 

U. S. A ■ • -26.7 

Australia 4 —26.3 

Canada — 25.1 

These considerations apply of course only in cases where 
the original disturbances have come from outside. In the United 
States,"" where the disturbing cause — a violent boom followed 
by a recession — was to be found within the country, the crisis 



1 Figures for lf)30 for a number of small countries, many ofwhich havesuffered 
acutely, arc nn1 yet available. Were statistics available for all countries, the 
composition of lliis Inblc might be sligluty altered. 

'•■ Source ; League of N;ilions : Memorandum on International Trade and Balances 
o/ Paumtttta, 19JH 1029, Vol. tit, page 9. 

3 Secluding sli !>■>' rtoraa. 

' ( iciici'iil I railr. 



— 236 — 

has been severe even though its foreign trade is of such relatively 
small importance to the whole economy of this country and the 
effect of a reduced foreign demand for American goods relatively 
slight. Of course, in the same way, the relatively small importance 
of the American market to the majority of the other countries 
tended to protect these countries from the effects of the depression 
in the United States. These effects have, however, unfortunately 
been felt through other channels than trade in commodities — 
namely, through financial factors. 

It is noticeable that amongst the countries which have most 
successfully resisted the repercussions of the depression are the 
small group of low-tariff countries in Europe — Belgium, Holland 
and Scandinavian countries whose domestic markets are 
the least sheltered against the varying forces of international 
competition. 

Of great importance for the position of each individual country 
has naturally been the situation of its chief customers. Countries 
selling largely to others which have been seriously affected have 
tended to suffer, while those whose customers have enjoyed 
favourable conditions have in general been able better to maintain 
their economic activity. It has been shown in the lasl chapter 
Hi at manufacturing countries which sell largely in the European 
markets have on the whole resisted belter than those exporting 
chiefly to other continents. 

In this connection it may be mentioned that the tariff increases 
which have occurred in recent years, and which have been 
especially important in the case of cereals in Europe and manu- 
factured goods in North America, have exercised a very profound 
influence on the exports of certain countries. 

A somewhat, different question may now be considered. 
As already described in some detail, borrowing countries have 
been adversely affected by the reduction of international capital 
movements. The interest level in these countries has been moved 
upwards, or a declining tendency counteracted, and a sudden 
restriction of investment activities has been necessary. In 
capital-exporting countries, on the other hand, the decline in 
rates of interest has been intensified. It is a special feature 
of this development that the balance of payments of the former 
countries has tended in a negative direction and that credit 
restrictions have, therefore, been necessary. In some of the 
lending countries, on the other hand, 'the balance of payments 
has tended in a posiLive direction and, consequently, the reserves 
of foreign exchange and gold have grown, thus counteracting the 
tendency towards a decline in the volume of credit. On the 
whole a tendency towards a positive balance of payments during 
limes of depression is favourable to the country concerned, 






— 237 — 

although the extent to which it affects credit conditions in the 
way just indicated depends on the domestic credit policy pursued. 

Such a tendency towards a positive balance may of course 
be caused by circumstances other than a reduction of lending 
abroad. The existence of relatively low price and wage levels 
in terms of gold, for instance, after currency stabilisation, exer- 
cises an influence in that direction until price conditions have 
become assimilated to those in other countries. Such has been 
the case in France and Belgium. It has already been pointed 
out above that this is one reason why the foreign exchange and 
gold reserves of France have been growing. Secondly, a special 
expansion in the export industries just before the depression 
may tend to increase exports more than imports, as was the 
case in the years 1927-1929 in Sweden, and this may exercise a 
similar influence on the foreign exchange reserves. Owing to 
the fact that the British price and wage levels in terms of gold 
have been relatively high, the position of Great Britain has been 
quite different. 

The existence of relatively low retail prices and wages has 
had a stimulating effect on conditions in France and Belgium 
for yet another reason. The upward adjustment of those values 
has had a stimulating effect similar to that produced by a mild 
inflation. In such circumstances, the arrival of a depression may 
cheek the upward movement of prices while these are still at 
a relatively low level compared with other countries and thus 
create favourable competitive conditions. On the other hand, 
some recession must be expected when a credit expansion ceases, 
as was the case in Hungary towards 1929. This may have been 
an aggravating factor in the Hungarian situation. 

In certain countries the currency has depreciated considerably 
in value, and the reduction of the price level has thus been kept 
within more narrow limits than elsewhere. This no doubt has 
tended to mitigate the depression in Spain and perhaps in 
some countries outside Europe. On the other hand, monetary 
conditions of this sort have tended to reduce foreign confidence, to 
check the inflow of foreign capital and to exercise an unfavourable 
influence in certain other respects. 

Another factor is closely connected with the more or less 
intense business activity prevailing during the years before the 
depression. In some countries the need of further investment 
in houses, roads, electrification, etc., was comparatively small 
when I he depression arrived, as such investment had been very 
huge in the preceding years. Such was the case, for instance, 
in I he United States. In Germany also, capital investments in 
iniiiiul'ncliiriiig industries up to 1928 had been considerable and 
capacity hsicl been so much increased in almost all directions 






1 



— 238 — 

that the need for new investment at existing interest levels was 
largely met ; although the situation with regard to houses and 
roads was probably different from that in the United States. 
In Germany, however, the restriction of the supply of foreign 
capital led to a sudden reduction of investment irrespective of 
the conditions of demand. In France, on the other hand, Lhe 
devastations of the war had created a great need for investment 
during the years immediately following 1918. Later on, monetary 
difficulties and other circumstances restricted investment activity, 
and the potential demand for such investments in 1929 was 
consequently great. This has tended to maintain the volume 
of investment all through 1930 and even in 1931 in spite of 
the counteracting forces set in motion by lhe depression as 
may be seen from the figures for production and imports of 
manufacturers' equipment. In other words, the existence of a 
need fo investment tended to mitigate the depression in France. 
This was also the case in a number of other countries where, 
as described in the last chapter, construction had been restricted 
for a variety of reasons in the preceding years. Further, in many 
countries, in the production of motor-cars and road building a 
temporary saturation point had not been so nearly reached as 
in the United States, and investment in motor-cars and roads 
continued to expand. 

Finally, the flexibility and adaptability of the economic 
systems of the various countries have differed greatly. In some, 
the flexibility both of prices and wages, Lhe mobility of labour, 
and the adaptability of manufacturers and farmers have all 
proved greater than in others. The extent to which their economic 
life has been affected by the disturbing influences of the world 
crisis has of course varied accordingly. This question will be 
further discussed in the last section of this chapter. 

The order in which the individual countries have felt the 
depression may now be examined. On this subject also numerous 
observations have been made in previous chapters. These may 
be briefly summarised as follows : 

In a number of countries, a severe recession was experienced 
in the latter half of 1929 ; in others in spite of the violent fall of 
the stock exchanges, the drop in world market prices, etc. — 
the decline in production only began in 1930. The former group 
of countries has in general played the mow active role in spreading 
the depression. This group comprises three types of country : 
(1) manufacturing countries such as the United States and 
Germany, where for domestic reasons an investment boom was 
succeeded by a recession ; (2) the countries producing vegetable 
foodstuffs, where tendencies towards over-production, under 
the financial conditions existing in the autumn of 1929, brought 



— 239 — 

about a rapid decline in the prices of foodstuffs : as typical 
examples may be mentioned Australia, the Argentine, Brazil, 
Canada, some Balkan countries and Hungary ; (3) countries 
producing raw materials, where a similar price movement was 
called forth by the reduction in demand for raw materials which 
accompanied the downward turn of the business cycle, and 
perhaps also by certain tendencies towards over-production. 
Among such countries were Bolivia, British Malaya, Chile, 
Finland and Peru. Some countries might be placed under both 
the second and third headings. This is true, for instance, of 
Australia, India, the Central American countries and large 
parts of Africa, Asia, Oceania and South America. 

The reasons why the depression in these countries has become 
so severe has been touched upon in the present and preceding 
sections of this chapter. Other countries occupying a more 
secondary position were unable to withstand the forces at work, 
and were dragged into the depression one after another. Some 
of these, such as Great Britain and Japan, were peculiarly 
sensitive ; others, like France and Scandinavia, showed greater 
powers of resistance. Even in the latter group of countries, 
however, the crisis in the summer of 1931 was severe. 

Uniformity in business conditions such as prevailed in the 
summer of 1931 is a rare phenomenon, as mentioned in Chapter III. 
It was not so complete even during the post-war crisis in 1920- 
1922, and far less pronounced during the. major trade fluctuations 
before the war. The explanation of this recent uniformity is 
probably that the forces making for business depression have 
been unusually numerous and strong, wlule the power of resistance 
has been relatively weak, owing to the tendencies making for 
instability in the world economic position in the years preceding 
the depression, to which reference was made in Chapter II. 
Further, for a variety of reasons the world is much more an 
economic unit than it was before the war or during the post-war 
period of disorganisation. 

On the whole the second group of countries, which came into 
the depression late, suffered little during 1930. Towards the end 
of that year, however, and in 1931, the rate at which the slump 
was proceeding in these countries does not seem to have been 
lower than elsewhere. 

An attempt has been made in Chart 32 to illustrate some of the 
fundamental relationships between the various countries with 
ivgiinl to the spread of the present depression. Countries falling 
under the three first headings may be called " foyers de crise ". 
Some cminlries can just as well be put in one group as in another 
and have, therefore, not beennieiitionedatallon the graph — e.g., 
South Africa, Portugal, Turkey and the Ccn tral American States. 



— 240 — 



Chart 32. 

Recession Tendencies in Different Countries. 

1 2 3 



Crisis in food 
production 



Argentine 

Australia 

Balkan countries 

Brazil 

Canada 

Columbia 

Cuba 

Hungary 



Crisis in raw- 
material production 



Bolivia 

British Malaya 

Chile 

Egypt 

Equador 

Finland 

India 

Mexico 

Netherlands Indies 

New Zealand 

Paraguay 

Peru 

Uruguay 

Venezuela 



Original recession 

in manufacturing 

industries 



Germany 
United States 




Falling demand and 
prices on the world markets 




Countries sensitive 
to foreign conditions, 
especially those in 1-3 



Austria 

Czechoslovakia 

Greece 

Japan 

Poland 

United Kingdom 



Countries less 

sensitive or selling 

much in Eurone 



Baltic countries 

Belgium 

Denmark 

France 

Italy 

Irish Free State 

Netherlands 

Norway 

Russia 

Spain 

Sweden 

Switzerland 



— 241 — 

Russia. 

The position of Russia has been peculiar. The radical change 
in the Russian economic system has rendered this country 
relatively independent of conditions abroad. The absolute level 
of production costs and prices in terms of gold in Russia, as 
compared with those in other countries, need have no influence 
on her foreign trade. Reductions in world market prices, if 
they affect all goods uniformly, naturally do not affect the 
terms on which Russia trades with the world. If she sells at 
declining prices it matters little so long as she can buy at prices 
which drop as much. Only to the extent that the goods she 
imports — chiefly manufactured cmomodities — have dropped 
less in price than the goods she sells — chiefly wheat, oil, skins 
and furs, timber and wooden goods — has she been adversely 
affected by conditions in other countries. While it is obvious 
that Russia under the present economic system is less sensitive 
to trade fluctuations elsewhere than she used to be, it should 
be kept in mind that, owing to the preponderance of agriculture, 
business conditions in Russia were relatively little affected 
by conditions abroad even before the war. (See Chapter VII.) 

As already mentioned, the increase in Russia's foreign trade 
in the last two years has had a double influence on economic 
conditions elsewhere. On the one hand, her reduced imports 
of raw materials and increased exports of certain foodstuffs and 
crude materials have intensified the slump in the price of these 
commpdities. On the other hand, her large purchase of machinery 
and other manufactured goods has tended to maintain produc- 
tion in certain industries in other countries. While it is clear 
that the favourable and unfavourable effects of this increase in 
Russian trade have been very unevenly divided between different 
countries, it is difficult to estimate the effect which, on balance, 
this change has had on the depression in the world as a whole. 



CJiina. 

The position of China, like that of Russia, has been of a 
somewhat special character. China is the only important country 
on a real silver standard, and the spectacular drop in the price 
of this metal has had a serious effect on her international economic 
relations. 

The trend of silver prices has been downward for the last 
sixty years. While at the beginning of the last century the ratio 
Of the price of silver to gold was about 1 : 15 and remained very 
stable, up to tlie 'seventies, it moved rapidly against silver when 
a number of countries went over to the gold standard in the 
Course Of thai decade. By the end of the century, the ratio was 




— 242 — 

about 1 : 33 and, by 1913, 1 : 37. This movement was interrupted 
during the war with the decline in the value of gold and the 
active European demand for silver with which to pay for 
goods supplied by the Eastern countries. By 1920, the ratio 
to gold was 1 : 15. In the following years, however, silver prices 
dropped almost without interruption and the downward move- 
ment was intensified. In February 1931, the price of silver was 
about one seventh of that ruling eleven years before and its 
ratio to gold approximately 1 : 77. 

Chart 33 shows the index of silver prices in London since 1924 
as compared with the index of wholesale prices in the United 
Kingdom. 

To explain this dramatic fall in silver prices it is necessary 
to study the conditions of supply of and demand for silver. 
First, it should be noted that the volume of production has 
increased considerably since pre-war days. While in 1913 and 
in 1920-1922 the annual production of the metal was approxi- 
mately six million kg., it has fluctuated around eight million 
kg. since 1926. Between 70 and 80 per cent of the total silver 
produced is a by-product of other metals (lead, copper, zinc, 
gold). This naturally makes the supply rather inelastic — i.e., 
little sensitive to changes in silver prices. A second source of 
supply in recent years has been the sale of old silver coins by 
countries which have abandoned the silver standard or reduced 
the quantities of silver in circulation. During the past four 
years such sales of old coins amounted to about 22 per cent of 
the silver mined. 

This increased supply has been met by a falling demand, 
as the use of silver as money was reduced when India, Persia, 
Indo-Chine, Siam and other governments replaced silver 
coins by metal or lowered their silver content. Further, India 
has been replacing token rupees by notes. Further, the use 
of silver in the arts has proved to be inelastic. It was affected 
unfavourably by the competition of many new alloys and by 
a declining popularity of silver in jewellery. 

These circumstances go a long way towards explaining the 
drop in the value of silver. It affected the economy of China 
in a double fashion. Depreciation of the stocks of silver involved 
certain direct losses for their owners ; this of course, was felt 
by British India and some other oriental countries in the same 
way. In the short run, however, it had little effect upon their 
purchasing power, as most of the private stocks consisted of 
silver ornaments, silverware and jewellery, which, although 
representing past savings, have probably a far greater sentimental 
than market value and are not likely to be offered for sale except 
under the pressure of penury. 



— 243 — 

Chart 33. 
Wholesale Prices in the United Kingdom and Price of Silver. 



















iuo 


^s 


SX 


PMX 


OES MAPCMAND/SES 


90 




X. * 


""■.. 


coMMOo/rr 


PP/CE6 


60 




PP/C£ OF S/l y£# 




1 


10 
















W 
















iu 
















40 
















& 

















1924 25 26 27 28 29 50 1931 

SD.Nff/e>543 



— 244 — 

Secondly, the drop in silver was accompanied by a decline 
in the Chinese exchange ; in other words, the Chinese tael depre- 
ciated in comparison with gold. The tendency of the price 
level, which had risen very little during the war, was clearly 
upwards, as may be seen from the table below. 

Table IV. — Wholesale Price Index in North China. 1 

1926 100 

1927 103 

1928 108 

1929 Ill 

1930 116 

1931 123 

(1st half) 

This rise in prices exercised a stimulating influence on industry 
and trade. In spite of grave political disturbances, international 
trade, although irregular, was well maintained up to 1929. 

Table V. — Index of Imports and Exports. 
(in gold value : 1913 = 100.) 

Imports Exports 

1913 100 100 

1926 203 220 

1927 — 167 — 212 

1928. . 201 233 

1929 — 192 — 216 

After the beginning of the world depression, the decline in 
the price of silver was accelerated and the Chinese exchange 
rates fell. This decline was no longer accompanied as in the 
preceding years by a corresponding rise in commodity prices. 
Wholesale prices continued to rise, it is true, while prices on the 
world market in terms of gold fell. The relative rise in Chinese 
prices, however, fell much short of the rise in the foreign exchanges, 
as may be seen from Chart 34. 

This sluggish movement of commodity prices in China, 
which in the interior of the country was almost certainly more 
pronounced than the chart indicates, made prices on the world 
market relatively high in Chinese currency. This was very 
much the same phenomenon as occurred in a number of countries 



Nankai Weekly Statistical Service, Nankai University, Tienlsin. 



245 



Chart 34. 

Ratio between "Wholesale Prices in North China and the 
United Kingdom, Ratio between the Price of Silver and 
Gold and Prices of Foreign Exchange in Shanghai. 



240 



220 



200 



180 



160- 



140 



120 



100 



&APPOBT CNT8E ies f»tr or 

MARCH AMtStt DeiACt/M£ on wotic 
£>r OU AorAi/M£-u/tr. 

GAT/O 8£7?r£CN COMM06/TY 

Pe/ces ft* A/oarff ch/ha A/vo 
m me umreo kmgdoju. 



{YALEl/P />£ I'Ofi PAG JfAPPOPT 
APPQ£C?AT/OM OF OOW M' 




1926 



1927 




i£OV£S0£S CMHGSS 
eTRAN6ERS AMA/MXA) 
ro#£/GM £-XCttAN6£5 
S/YSMAAQMA/ 



Sources : Nankai Wcclchj Statistical Service. 
The Board «/ Trade Journal. 
1'lie Economist. 



— 246 — 

with depreciating paper currencies during and after the war. 
Naturally, the effect of such a development was to stimulate 
exports and reduce imports. At the same time, the general 
rise of the price level tended to mitigate the influence of the 
world depression on Chinese economic conditions, and thus 
tended to maintain a larger volume of external trade than 
would otherwise have been possible — i.e., to offset in part the 
factors making for decline. 

The value of Chinese exports in terms of gold seems to have 
dropped by a little more than one-third in 1930, while imports 
declined by about one-fourth. In view of the fact that China 
exports chiefly raw materials, the prices of which have declined 
more than those of her imports, it is difficult to say whether 
the volume of exports or of imports has declined the more. In 
any case, the Chinese trade figures have altered in very much 
the same way as those of many other exporters of primary 
products, and the influence of the monetary factors mentioned 
above cannot have been great in 1930. Whatever restrictive 
influence on the Chinese imports of foreign commodities they 
may have had has been due, not to the drop in silver as such, 
but to the failure of domestic prices to rise equivalently. Chinese 
foreign trade is only 2% per cent of total world trade, and the 
small reduction — if, indeed there was a reduction — of China's 
imports owing to the drop in the price of silver can scarcely 
have proved a factor of any major importance operating towards 
an intensification of the world depression. In this connection, 
it may be observed that the exports of Japan and the United 
States to China have fallen off by about the same percentage 
as their exports to other countries. The decrease in the 
exports to China from the United Kingdom, however, was 
considerably larger. On the other hand, it is probable that certain 
countries, such as India, the exports of which compete to some 
extent with Chinese goods on the world's markets, have been 
adversely affected by the depreciation of silver. 



D. Relative Changes in Producers' and Consumers' 

Industries. 

Changes in business conditions are always to some extent due 
to a lack of balance between production and consumption of 
commodities or services. There is a widespread popular belief 
that a lack of balance of a very simple sort developed during 
the years before 1929 and led to the present depression. The 
argument is as follows : 



— 247 — 

The capacity for production outran the capacity for consump- 
tion and thus it became impossible to sell the goods produced 
at profitable prices. Hence the only real remedy is to reduce 
productive capacity — e.g., ilirough a shortening of the 
working day. It is not difficult to show that this opinion is 
not well founded. While the demand for certain commodities, 
such as wheat, may be strictly limited, the ability to consume 
goods in general is practically unlimited. 

Others hold the view that a lack of balance developed between 
supply and demand, not for goods in general, but for certain 
classes of goods. During the years before 1929, it is argued, 
productive capacity increased too much in certain industries 
and too little in others. That Lhis should happen to some extent 
is inevitable, as production is planned to satisfy a future demand 
which cannot be accurately forecast. Too much capital and 
labour was drawn to certain industries in which consequently 
capacity could not be fully utilised. This reduced total output 
and total national income and thus to a greater or less extent 
the demand for all commodities. As a result, surplus capacity 
eventually appeared in other industries also. One reason why 
too much capital went into certain channels was that the effect 
of rationalisation on productive capacity only became evident 
some years after the majority of manufacturers had begun to 
rationalise their plant and organisations. Thus not long before 
the outbreak of the depression it became apparent that the 
productive capacity of certain important industries had been 
much increased in a number of countries owing to the policy of 
rationalisation pursued simultaneously by the manufacturers in 
those industries. They had all at the same lime taken measures 
to increase the effectiveness of their plant, but the consequent 
increase in the capacity of these industries only became evident 
a couple of years afterwards ; in many countries not long before 
the present" depression. Among economists who hold this 
view opinions vary, however, regarding the actual way ui which 
investment was misapplied. Some- consider that capacity had 
been too much increased in the older industries for the products 
of which demand could not be expected to increase very largely. 
Others believe that too much capital was invested in new indus- 
tries, producing motor-cars, wireless apparatus etc as the 
demand for such durable consumers' goods was inflated through 
profits from stock-exchange speculation. Others again assert 
I hat there was a disproportionate investment in industries, 
whether new or old, which were most prosperous during the 

boom. 

A special form of the theory that investment was over- 
ronservafivc is thai savings had grown more rapidly than the 



— 248 — 

need for new investment, and that in consequence the long- 
term rate of interest should have fallen considerably. Had 
interest rates been rapidly reduced, capital would have flown 
into industries requiring large capital investments, and relative 
commodity prices would have changed in such a way that the 
increased output of these industries could have been sold at 
profitable prices. For instance, the demand for houses and 
flats would have been much greater had the rent been calculated 
on the basis of a 4 % rate of interest instead of 6 %. In fact, 
over-optimistic entrepreneurs borrowed new savings at the 
higher rate of interest and invested them in a way that would 
have been natural had there been a smaller supply of new 
capital. Hence capacity in some industries came to exceed 
demand and could not be utilised. 

A more refined version of the over-production theory is 
stated in terms of supply of and demand for consumers' goods, 
not goods in general. The proportion of the national income 
spent on consumers' goods, this theory suggests, was smaller 
during the boom period than the proportion of total output 
represented by such products. Hence demand fell short of 
supply, stocks increased, prices declined, output was restricted, 
and business conditions in general affected. This theory, 
which seems to find some support in the fact that in many 
countries output of consumers' goods began to decline at an 
early stage of the boom, is to some extent connected with different 
forms of the over-saving theory, which is roughly to the effect 
that, at a certain period during the boom, part of the savings 
were not used either to buy producers' equipment and durable 
consumers' goods or to increase stocks of commodities. Hence 
savings were not used in full and purchasing power was less 
than it would otherwise have been. 

The opposite theory, that savings were not too large but 
too small in comparison with the actual output of durable goods 
for equipment and for consumption, has also been widely held. 
Towards the end of the boom, according to this theory, the 
proportion of national income saved fell off in relation to the 
proportion of productive energy which was directed towards 
the manufacture of producers' equipment or durable consumers' 
goods. Hence fluid capital became scarce, short-term rates 
of interest rose to a high level and the demand for raw materials 
either for equipment or for durable consumers' goods fell off. 
Their prices began to decline and business conditions in general 
were affected. 

Most of these conflicting theories, and all those which have 
been accepted by economists of repute, have something to do 
with the relation between the production of investment goods 



— 249 — 

— i e producers' equipment and durable consumers' goods — 
and the output of non-durable consumers' goods. In the present 
section, an attempt is made to throw some. light on this question 
through a study of the production and prices of various classes 
of goods during the depression and the years preceding it. 
It is unfortunate that material throwing light on the other 
aspects of the problem — namely, the relation between savings 
and total national income — is not available. For many reasons 
the figures for savings deposits, issues of new shares and bonds, 
etc., are entirely inadequate for this purpose. 

No attempt will be made below to verify any of the theories 
mentioned above or to discover an explanation of the recurrence 
of business cvcles. For this task a detailed analysis of conditions 
during earher cycles would be required. This volume is con- 
cerned only with a description of the course and phases of the 
present world economic depression and the reasons lor lis 
exceptional severity. , . . . 

For the purpose of the following description of the principai 
changes in the morphology of production in recent years, it is 
important to distinguish between producers' and consumers 
goods on the one. hand and between durable and non-durable 
goods on the other. By producers' goods are understood 
manufacturers' equipment and materials required for the 
production of this equipment. Consumers goods are both 
materials for the production of consumers' goods and finished 
consumers' goods, which can be either durable (motor-cars) 
or non-durable (food). Savings are invested in durable consu- 
mers' goods and in manufacturers' equipment, but can of course 
be used also for an increase in the stocks of any kind of commo- 
dities. The classification is thus as follows : 

I. Producers' goods. 

A. Materials for the production .of capital equipment 
(e.g., iron and steel). 

B. Manufacturers' equipment (e.g., machines). 

II. Consumers' goods. 

A. Materials for the production of consumers' goods 
(e.g., cotton, wheat). 

B. Finished consumers' goods. 

1. Durable (e.g., clothing, watches). 

2. Non-durable (e.g., food). 

Composite indices of industrial production which group 
together producers' goods on the one hand and consumers goods 







— 250 — 

on the other, are available for Germany, Poland and Sweden * 
For other countries, such as the United States and Great Britain" 
recourse must be had to indices for individual induSf Iron 
^';l eel , are the Pnncipal raw materials used in manufacturing 

been Sn T' P T" V ^ P roducti ™ ■* pig-iron has Jong 
been taken as a fairly representative index of the eauioment 

retlifvS S ESS** The "J8 0I thls "^ ha\VreSt 
recent jests, largely because of the fact that steel is to an increas- 

portion of the stee produced goes to the manufacturing of 
S' C Z Neve rtheless the iron and steel industry reflects 
hettei than any other the output of producers' goods The 

SriS £3? HldUSt1 ^ 1MY , be WW for Sample, by 
indices for the engineering and timber industries 

nrnrLLr? f^ F ^ a re P^entaUve index for the 
production of consumers goods. The motor-car industry may 

conZw? Z f S ' b r t ta . ken .f S Crating the output of Lnbfi 
S vT , g w" fhe , teXtJle tradcs » most countries represent 
la rij well what may be called the output of « semi-durable " 
consumers' goods ; it should be remembered, however that 

r^n e Jr d n U ? ia \ haVe be ^ subject t0 considerable structural 
SSf ,, '™ ent + ^ ar «- The production of perishable consumers' 

&d£teEf r ° m the indie< -' s for lhe f00d and drillk 

Ail analysis of available material may now be attempted. 

divided ^n lnc . luded . m the Geaaaa index of production are 
dmded into producers' and consumers' goods * The annual 

uXws: aV6raSe) illdiCeS f ° r thGSe tw0 gr0LipS have varied as 

Producers' goods . , 
Consumers' goods , .' 

tl. J'lnV? 6 exi,a " s T hl tlw first ^ rou P of ^^stries was greater 
than in the second during the years immediately preceding the 

SSSKI T f T ed b ,? the fact that iji '927-28 y tL S2K5 

IS ta * ay n st ™ mts , m penaan manufacturing industries which 
went into producers industries was no less than 72 per cent » 

«/ «fi«s$ ^^&3&rffi%v n a ^"? the wf yeQ ^ 00 * 

Statistics. ^""ons, iy.su dl, lable 91, and. the League Monthly Bulletin of 

m^linoJ^ ^Zl^JT 1 ' im , n -' » on - fe "ous metals, building materials, soda 

SJsS^aJSSfe" '* Veh,Ck ' S ' b0 ° tS and Sh0es ' P° rcelai "' Paper and 

tJj < f pi !?, m i H ^ n ' J ^" ! " 1 *"<'kMI0W in dec deutschen Volkswirischaft 1924 hi, 
W8, In-ititut fur Korijunkt :urft»rsc hung, Berlin, 1931 voiKSWlrlscna t t ' 19i * h is 



1927 


1928 


1929 


1930 


97 


100 


106 


82 


99 


100 


94 


86 



— 251 — 

The development from quarter to quarter in 1929-1931 may 
be seen from Chart 35. 

In the autumn of 1928, output began to contract in the 
consumption industries. Producers' goods industries did not 
follow suit ; important branches of production — e.g., the iron 
industry — continued to expand until the middle of 1929. 

Indeed in June, production in these industries was 18 per 
cent above the 1928 level. This was partly due to the fact that 
foreign markets were very favourable to Germany during that 
period. In the middle of 1929, the demand for capital equipment 
on the world markets slackened and real investment declined 
within Germanj^. Thenceforward the output of producers' goods 
dropped much more rapidly than that of consumers' goods. 
Figures for the utilisation of capacity point to the same conclusion. 
Statistics of persons wholly unemployed in other than seasonal 
trades show that the degree of unemployment was about equal 
in equipment and consumption trades in the middle of 1927 ; 
during the following year, it rose in both groups, but more in the 
latter. The rise in the two groups was parallel from the summer 
of 1929 until the beginning of 1931, when an improvement took 
place in the consumption trades, while the situation in the 
equipment industries became more and more grave. The 
building industry did not experience the usual seasonal revival 
and added a heavy contingent to the army of unemployed. 

A pair of indices showing the aggregate production of produ- 
cers' and consumers' goods is also available for Poland 1 . The 
movement of these indices, which are adjusted for seasonal 
variations, may be seen from Chart 35 ; the annual indices, 
shifted to the base 1928 = 100, are as follows : 



Producers' goods 
Consumers' goods 



1928 


1929 


1930 


100 


99 


79 


100 


94 


79 



Polish industry was most active in 1928. Since the beginning 
of 1929, there has been a downward movement, which was rather 
slow during 1929, but gathered speed in the first quarter of 1930 
and again a year after. The equipment industries passed the peak 
a little earlier — at the end of 1928 — than the consumption 
trades, but the output of the former in 1929 fell by only 1 per 
cent as compared with 6 per cent in the case of the consumption 
trades. The subsequent variations have been considerably 
wider in the equipment industries. The aggregate fall from the 
1928 level to 1930 was equal in both groups, but the output 



1 The indices cover mining, metallurgy, engineering, chemicals, mineral manu- 
fiicl iniiig. wood, building, lexliles, clothing, leather, food, paper, graphic arts. 



252 



Chart 35. 



PRODUCTION OF PRODUCERS' AND CONSUMERS' GOODS, 1928-1931 I « 

(1928 = 100.) 



120 

inn 










fin 


S--\< 


******^^ '^~ "— -., _^^ 






60 


■ 1 J 


— 1 1 — <■ 


1 1 i 


' 




1 Quarterly averages. 

2 Sources : Institut Kir Kunjunklurforschung. 

Polish Institute for Economic Research 
Soenska Finimslidnini/. 



253 — 



of the equipment industries dropped much more heavily in the 
beginning of 1931. 

The relative changes in the output of equipment and consump- 
tion industries have been analysed by the Swedish Committee 
on Unemployment. The material used is comprehensive, covering 
practically all the industries of the country. The indices are, 
however, only annual and do not extend beyond 1929. These 
annual indices, based on 1915 = 100, are as follows : 



Producers' goods 
Consumers' goods 



1927 1928 1929 

122 129 150 

124 132 143 



The equipment trades had been developing more rapidly 
than consumption trades since 1924, but not until 1929 had 
they advanced more since the basic year than the consumption 
industries. Calculations relating to the production per hour of 
work in both groups go to show that the process of rationalisation 
had been more intense in the equipment trades. 

In the Swedish monthly index of production of the Svensk 
Finanstidning, the equipment industries are well represented, 
but most of the important consumption industries are not 
included 1 . The movement of production in the former may 
be seen on Chart 35. 

General industrial activity in Sweden increased rapidly in 
1929 ; the culminating point was reached in January 1930, but 
a high level of activity was maintained throughout that year. 
In the first half of 1931, production fell sharply. 

To judge from the unemployment figures, 3 the drop in output 
has been much the greatest in industries manufacturing producers' 
goods. Between the spring of 1930 and the summer of 1931, 
there was little change in the figures for unemployment in the 
textile and tobacco industries, but in the iron works and the saw 
mills unemployment rose rapidly. 

The Board of Trade indices for the output of certain important 
industries in Great Britain are given below (base, 1924 = 100). 



Iron and steel and products . 
Engineering and shipbuilding 

Textiles 

Food, drink and tobacco . . 



1928 


1929 


1930 


102 


114 


89 


113 


121 


117 


100 


99 


79 


102 


106 


105 



1 The index comprises (a) iron ore, iron and steel, wood, wood pulp, paper, 
superphosphates, and (b) tobacco manufacture and malt liquors. It will be 
noli'd Ihal textiles are omitted. 

* For slalislies ol' unemployment see Table 11/; on uncmploynienl by groups 
of iinlnsl lii's in I he Statistical Ymr Hook oj llir I.i'iu/iir of Nations, 1930-31 ; ' '"' 
lablr has lircn supplied by the Inl crual ional Labour Ottico. 



— 254 — 

The movement is shown in greater detail on Charts 36 
and 37. 

The peak in productive activity was reached as early as the 
second quarter of 1929 in the iron and steel industry, then in the 
food and drink industries, then in textiles, while for engineering 
the highest figure is recorded in the first quarter of 1930. Com- 
pared with the average level of 1928, the peak reached by iron 
and steel was somewhat higher than that attained by textiles, 
but the subsequent decline has been much heavier. 

The percentage of trade unionists out of work in the metallur- 
gical, the cotton and the drink industries has been as follows : 



March 
1931 



March March March 

1928 1929 1930 

Metallurgical industry 20.3 17.6 26.1 45.8 

Cotton industry 9.2 11.5 27.1 36.5 

Drink industries 6.0 6.7 9.5 13.0 



It should be noted that unemployment decreased as between 
March 1928 and March 1929 in the metallurgical industry, but 
increased in the two consumption trades. In the two last years 
under review, unemployment has increased all round, and rather 
more in the cotton than in the metal industry. 

The developments in the United States may be conveniently 
illustrated by the Federal Reserve Board indices of the output 
of four representative industries. The indices are adjusted for 
seasonal variations and have been converted to the base 
1928 = 100. 



Iron and steel 
Automobiles . 
Textiles . . . 
Food products 



These indices and Charts 36 and 37 show that the depres- 
sion has been much heavier in the iron and steel and motor-car 
industries than in the others ; the low output of these industries 
in December 1930 is striking. The fluctuations in the food 
industry are relatively small. According to a recent estimate, the 
output of consumers' goods in the United States declined 21 per 
cent from the first half of 1929 to March 1931, while the 
corresponding decline in the output of producers' goods was 
37 per cent. If motor-cars are excluded, the decline in the 
first group is much smaller. 



1928 


1929 


1930 


100 


109 


80 


100 


123 


77 


100 


107 


85 


100 


99 


95 



255 — 



Chart 36. 



Production of Iron and Steel and of Motor-cars. 
(1928 = 100). 



££Q £TAC/£/3 - JBOM AND 6T££L 




























20 


._ 






. 


// 
If 


s? 




s' 


V 










— o^* 




fcV 

r' 








\ 
\ 






100 




\V' 






































" 








BG 






' 


' 


















60 


























— WtrED KW6POM 

Mie&tASftS~ (,eBMAt/Y 














■ — r \ I I I 














1 


iflze 


II 


J 


1 II 

1929 


1 


1 


1 II 
1920 


i 


* 1 

1931 



AUTQMQ3it£S -MOTOG-CARS 




II III IV i 

I9J0 1931 



Sources : Federal Reserve Board. 

lnslilul Trtr KonjunkUirforsdnirifi. 
London and Cambridge Economic Service. 
Slntliligufi gintmlc tin la Franc*. 



256 



Chart 37. 

Production of Textiles and Leather and Shoes. 
(1928 = 100.) 



TEXTILES 



m 



1 00 



60 




I \ 1 

. ETATS i/WS O'AM.-US*. 



FRANCE 

, GOVAUME UN/ 

ci/v/reo k/n6oom 4- 

ALLEMAQME -GEQM. 



I II 111 IV 

1928 



".."' 



ii hi iv \ i in iv i 
1929 1930 1931 





CU/QS, CHAUSSUQES 


- LEATHEG AND SHOES 






























120 












, 


. 






















.^ / 


/ 


y ■ 


■•'/■ 


^"N 






i 




* 


100 


* 


\ 
\.- 
.1. 


\ 


s 


/~**i 


s. 


— » rf " 




— 1^. 




"V-- 










1 
















\\ 


1/ 


OU 
































60 


/iOVACME l/W 

uwrea kwgdom 














' AU£ 

i i 


MAOME -GEQMAMf 

! 
















1 1 



















H III 

1928 



1929 



II III IV I 

1930 1931 



Sources : Board of Trade. 

Federal Reserve Board. 

I n s I it ill tilr KonjunkLurfOrschung. 

Slntis/it/iir ijhih'iilf tlr 1<t h'Kinit'. 



257 — 



The variations in factory employment shown on Chart 38 
point to a similar conclusion. 

The statistical evidence that has been examined shows 
that in the equipment industries the fluctuations have on the 
whole been broader, the expansion greater and the subsequent 
depression deeper than in the consumption industries. It has 
thus broadly corroborated the generally accepted view on 
changes in production during the business cycle. 

It is more difficult to state whether changes appeared earlier 
in the equipment industries than in the consumption trades in 
each successive phase of the cycle. 

The industries in which the most vigorous progress was 
recorded in the years preceding the depression were, on the one 
hand, equipment industries, both old and new — iron and 
steel, mechanical and electrical engineering, shipbuilding, etc. 
— and, on the other hand, " new industries ", producing both 
equipment and consumption goods, but more especially the new 
forms of durable consumers' goods, such as motor vehicles, 
electric and wireless apparatus, gramophones, rubber goods, 
etc. The " old " consumers' industries expanded much less, 
if at all, during 1928 and 1929. After the turn of the business 
cycle the tendency was reversed. The leading equipment indus- 
tries were most seriously affected, although production of elec- 
tricity and electrical engineering to a large extent escaped. 
The " old " consumers' industries have generally suffered less 
than the other group ; the "new" consumers' industries, on 
the other hand, which produce durable goods such as motor-cars 
and wireless apparatus, have felt the effects of the general 
slump almost as much as the equipment trades. The semi- 
durable goods such as textiles have declined less, and that of 
non-durable goods little or not at all. Thus the production of 
goods requiring savings has been much more restricted than that 
of goods which are not bought out of savings. 

It is not possible to draw any conclusions regarding changes 
in the total volume of real investment from the above figures 
for the output of manufacturing industries alone. These figures 
would suggest, however, that during the years 1927-1929 the 
vloume of investment was increasing much more than the output 
of non-durable commodities. This impression is confirmed by 
the fact that building activity seems almost everywhere to have 
been unusually large (Chapter V A). Again, the export of equip- 
ment goods such as machines from the leading manufacturing 
countries grew rapidly in this period. This would appear to 
indicate that investment in other countries has been expanding 
:ilso. The world production of iron and steel increased rapidly 
Iroin 1921 tO 1929, I >i 1 1 b;is since declined lo about 0ne-hS.1l; the 
miiximum inoiil lily figure. 



- - — 258 — 

Chart 38. 

Factory Employment in Certain Industries in the 
United States. 1 2 

(1923-1925 = 100.) 




An estimate of the amount of capital invested in construction, 
machinery, railways, motor-cars, farm implements and livestock 
in the United States leads to the conclusion that it tended to 
rise from 1924 to 1929 inclusive, although there was a notice- 
able set-back in 1927. In Germany, total real investment, 
excluding stocks of commodities, rose rapidly from 1924 to 
1927 3 . It is not surprising that a large part of this capital 
seems to have been invested in a way which assumed a continued 
rise in the standard of living and consequently in the demand, 
e.g., for theatres, cinemas, restaurants. An over-estimation 
of future demand is of course characteristic of boom periods. 



1 Adjusted for seasonal variations. 

2 Source : Federal Reserve Bulletin. 

8 Kapitalbildung und Investitionen in der deutschen Valkswirtscha.fi, 1921 bis 
1928, Institut fur Konjunkturforschung, Berlin, 1931. 



— 259 — 

Tin- genera I impression obtained from Liu- somewhat scanty 
material examined above- and certain other sources of informa- 
tion is that in the years before the depression, an i acre a sin g Vcr- 
oentagi' oil he i i.i 1 1 mud income was being used lor rent investment 
One may thus speak :ctf the ; cxistcncAf an investment bo »' 
This large investment may have hen one of the factors which 
brtenufied tbfi ensnmg depression (r/. Chapter VII) during which 
investiuenl has hi lien fi W ith great rapjdil y. 

Prices. 

The effects of the relative changes in different branches of 
production on the price system and the movement or the prices 
of the various groups of producers' and consumers' goods enu- 
merated above may now he briefly analysed. The first obstacle 
to such an analysis lies in the feet that only a few countries 
publish price indices of producers' and consumers' goods in a 
form which can be used for the purpose in question • indeed 
such data nre available only Tor the United States of America' 
Canada, Italy and Germany. 

The price movements shown by the indices for the various 
countries ' mentioned during the 'years preceding the present 
depression have been influenced by certain factors or a special 
kind. Thus the year-to-year price movements of materials for 
consumers' mind-; (largely textiles and foodstuffs) are greatly 
influenced by crops and do not genuinely reflect variations in 
consumers' demand. Again, in many countries the materials 
for producers' goods have been subject to a more or less effective 
monopolistic control, so that here variations in demand are 
generally reflected in output rather than in price. Indirectly, 
these factors also affect the supply and the prices of the finished 
goods. Hence the price movements of the various classes of 
goods do not vary as they would do if they were influenced 
exclusively by the changes in demand and in productive capacity 
which occur during the business cycle. 

In the table which follows are set out the relevant indices 
for the four countries mentioned above. The classification 
under the various headings is approximate ; it is not identical 
with that used in the indices as originally published; columns a, 
d and e represent finished commodities, while b and c are raw 
materials and semi-manufactured goods. 



1 The Indices Tor Canada arc official ; those for the United States are published 
by t ht- National Bureau of Economic Research ; those tor Germany by the Inslitut 
fiir Knnjunklurforsc.liung ; and those for Italy appeared in a special article in 
La Vila Economica Italians, March 1931. 






260 



Tabic VI. — Price Indicia of Producers" and 



Consimurs' Goods. 



Canada 

(.1928 = 10(1) 

U. S. A. 
(.1913 = 100) 



Yw 



!"i odticers* Goodt 



Prodoc- (Material 

its' for 

i-.i|ni|i i-;[]uip. 

MlL.Ul llll III 



Geimanv 
(1915' = 



100) 



Italy 
(1*001-1009=100) 



1927 
1 92S 
1 929 

1927 
1 928 
1929 

1927 

192-8 
1929 

1927 
192.S 
1929 



101. 1 
93, 7 
94.6 



l '- ,m - ew' hi.lhu 



Material] FlnfchcdCotuu 

I .nnsuui- ~ __ 



l«IT«' 



■ niuum 

Good 
c 



98 . 6 

90.9 

or. 9 



155 

154 

155 



130 
1 .57 
139 



137 
139 
138 

5 OX 
151 
-172 



134 
139 
133 

154 
162 

115 

11315 
670 
til 9 



i titrable 



93.3 
92.9 
91.1 

176 
177 
175 

1G0 

175 
172 



ilill >.M, 



99,1 

99.(1 
100.0 

151 
153 
152 



678 
B82 

597 



It is noticeable thai in all four countries lor which data are 
available the prices of producers' equipment or manufacturers ' 
materials for producers* equipment rose somewhat, in I he last 
stages of the boom period, while prices for consumers' goods 
and materials lor these goods were already moving downwards 
In Sweden, where the tendency of the price level was downwards 
in 1027-1929, prices of producers* equipment and materials On 
equipment dropped less than the prices of consumers' goods 
and their raw materials. Wages rose more in industries producing 
commodities of the former type. 

The German indices for producers' equipment show fewer 
and smaller fluctuations than those for other countries, as they 
consist chiefly of goods such as iron and steel, timber, etc., 
whose prices are determined on regional markets and are largely 
controlled by cartels. A more detailed examination of the 
monthly indices for Canada shows that the price of producers' 

1 June. 






— 261 — 

equipment dropped quite regularly throughout 1927 and the 
first half of 1928, while consumers' goods as a whole were fairly 
steady. Producers' equipment began to rise in price in the latter 
part of 1928, while finished consumers' goods, after reaching 
their highest point in September 1928, tended to fall and rose 
again only in the last stages of the boom ; the prices of producers' 
equipment continued to rise throughout 1929 and the first 
months of 1930 and dropped only in May of that year. 

In the United States, prices of materials destined for capital 
equipment reached their highest level (in the three years 
considered) in March 1929 ; during the rest of that year they 
gradually receded. Finished consumers' goods as a whole rose 
between the beginning of the year and September, then dropped 
swiftly. Durable consumers' goods (other than foods) were gradu- 
ally falling in price throughout the year, while non-durable goods 
(foods) rose very sharply between April and September. 

The price movements of these various groups during the 
depression may now be considered. In the table which follows 
are set out indices for the three countries for which figures for 
1930 and 1931 are available. 

Table VII. — Price Indices of Producers' and Consumers 1 Goods. 
(June 1929- June 1931.) 



Canada 
(1926 = 100) 



U. S. A. 
(1913, 



100) 



Germany 
(1913=100) 



Year 



Producers' Goods 



Produc- 
ers' 
Equip- 
ment 



I tine 1929 
1930 
1931 



June 



1929 
1930 
1931 



June 



1929 
1930 
2 1931 



94.0 
91.4 
89.1 



Material 

for 
Equip- 
ment 



Consumers' Goods 



Material 

for 
Consum- 
ers' 
Goods 



92.2 
82.5 
62.0 



156 
143 
131 



138 
138 
131 



138 
132 
119 



130 

111 

89 

147 

119 

90 



Finished Consumers' 
Goods 



Durable 



91.2 
86.4 
80.2 

175 

166 
148 

172 
161 
142 



Non- 
durable 



96.7 
94.2 
70.1 

147 
136 
109 



1 April. 

' May. 




— 262 — 

It is obvious that in all cases consumers' goods, both durable 
and non-durable, have fallen more in price than producers' goods, 
both the finished equipment and the raw materials used in 
manufacturing them. This is chiefly due to the fact that the raw 
materials for consumers' goods, in particular crude foodstuffs 
and textiles, have dropped much more in price than the minerals 
and metals which form the basis of producers' equipment. 
The prices of many of the latter commodities are determined on 
regional markets, and, as already mentioned, have been subject 
in many parts of the world to effective monopolistic control. 
Accordingly, as shown above, the major fluctuations take place 
in output rather than in price. Thus the price movement was 
the opposite of what might have been expected as a result of 
the presumably greater decline in the demand for producers' 
equipment than for consumers' goods. 

In Canada, prices of producers' equipment fell by only about 
5 per cent between June 1929 and June 1931 ; those of foods 
ready for consumption fell by 28 per cent and of other goods 
ready for consumption by 12 per cent. In this country, prices of 
building and construction materials fell by 16 per cent. In the 
United States, the materials for capital equipment fell in price 
by 16 per cent between June 1929 and April 1931, while foods 
ready for consumption fell by 26 per cent and consumers' goods 
other than foods by 16 per cent. In Germany, prices of raw 
materials for producers' goods fell by 14 per cent between June 
1929 and May 1931, those of finished producers' goods fell by 
5 per cent and consumers' goods other than foods by 17 per cent. 
It will also be observed that, contrary to what might be expec- 
ted, non-durable consumers' goods (chiefly foods) have fallen 
more in price than durable goods. This does not, however, 
indicate a greater intensity of consumers' demand for the latter ; 
the raw materials for foodstuffs have, in genera], fallen more 
than those for other consumers' goods ; further, durable goods 
are usually highly manufactured : for reasons given elsewhere 
in this volume such goods generally fall relatively little in price 
during a depression. 



E. The Inflexibility of the Economic System 
in Relation to the Depression. 

The inability of the economic system to adapt itself rapidly 
and smoothly to fundamental changes in demand, supply' 
technique, savings, etc., is a condition of maladjustments 
and depressions, bixed capital cannot suddenly be made 



— 263 — 

liquid and re-invested in a different form. Hence excessive 
investment in certain branches of industry affects the capacity 
for production for a considerable time. Labour also is frequently 
unable to shift easily from one occupation to another, and, for 
several reasons, a change in production often takes a long time 
to effect. Tariffs and other obstacles to international trade 
constitute a special impediment to smooth adaptation. They 
enhance the difficulty of adjusting trade balances — for example, 
to a change in international capital movements — and thus 
contribute to economic and financial difficulties such as have 
been described in earlier sections of this report. If the adaptability 
of the economic system were greater, depressions would be less 
severe. Tendencies towards over-production in certain industries 
would more quickly disappear. For instance, if after 1929 
the output of foodstuffs had been slightly reduced, the prices 
of such products might have been maintained on a higher level 
and the violent shift in incomes to the disadvantage of the 
farming population have been more or less avoided. The situa- 
tion of manufacturing industries would in consequence have 
been less disturbed (cf. Chapter VI A above). 

Maladjustments within the economic system usually call 
forth their own corrective — a change in the relative prices of 
commodities and services, tending to make the necessary re-ad- 
justment profitable. If adaptation is impeded by severe friction 
— for instance, if supply is very inelastic — then a change in 
demand will bring about a greater movement in prices than 
would have taken place had the adaptation been more easy to 
effect. In a sense, the function of a decline of prices below costs 
is to call forth a reduction in supply. For instance, a decline 
in rubber prices tends to bring about a reduction in the number 
of rubber trees planted. 

A price decline of this kind may not take place, even where 
capacity of production is far in excess of demand, if supply is 
restricted through some form of monopolistic control. Such 
restriction is one way of remedying an excess of supply which 
would otherwise be corrected by a re-adjustment of production 
through the medium of price changes. Experience seems to 
prove, however, that it is essential to the smooth working of 
the economic system that there should be some relation between 
the quantitative and price adjustments effected in different parts 
of the economic system. If, for instance, a sudden and consider- 
able reduction in demand leads to an organised restriction of 
supply and consequently a maintenance of the prices of certain 
products, but at the same time to a heavy decline in the prices 
of others, the situation becomes to some extent unbalanced 
and unstable. Such conditions may arise if the prices of certain 






264 — 



raw materials and semi-manufactured goods are maintained, 
while prices of finished commodities are allowed to drop. In 
such circumstances, the prices of unregulated raw materials and 
semi-manufactured goods tend to fall sharply. In the same way, 
fixity of certain wages may strengthen the tendency towards 
a drop in other wages. On the other hand, if prices of finished 
commodities are maintained at a high level, the demand for 
these commodities may be reduced and thus indirectly the 
demand for raw materials. The prices of raw materials may 
in this way be depressed much more than they would be other- 
wise. Further, the quantity of any commodity which can be 
sold at a pegged price is smaller than it would be if the price 
were allowed to drop. A quantitative reduction of this sort may 
have serious reactions elsewhere. Rigidity in the prices of 
certain classes of products tends to increase the variations in 
other classes of which the prices are more flexible. 

The problem of the classes of prices which have shown them- 
selves relatively inflexible in the course of the present depression 
is of some importance. Many finished consumption goods have 
been subject to monopolistic regulation and have varied little, 
or in some cases not at all. Such a regulation of prices has been 
especially common in Germany. Finished commodities belonging 
to the group of manufacturers' equipment do not seem to have 
been subject to such control to any large extent, but, like manu- 
factured goods in general, they have declined relatively little 
in price. Several items entering into the cost of producing 
finished consumers' goods or manufacturers' equipment have 
also changed very little. The prices of certain raw materials 
and semi-manufactured goods, such as iron and steel, cement, 
glass, bricks and certain chemicals, have on many important 
markets been maintained at a level which is only slightly lower 
than that of 1929. Further, the wage rates of manual and other 
classes of labour have, in most countries, declined little. Long- 
term interest rates have also declined relatively little — by approxi- 
mately one-tenth from the high level ruling in the boom years. 
Taxation has not been reduced — in some cases has even been 
increased — and the real weight of specific tariffs and of public 
and private debts has been increased in proportion to the decline 
in prices. 

How far this relative inflexibility in certain parts of the 
price system has tended to intensify or to mitigate the depression 
may now be examined. It will be more convenient perhaps to 
put the problem in a more concrete form and to ask whether 
the output of industry would be increased or diminished by a 
reduction of these rigid prices and wages. Some economists 
believe that a reduction in costs, which would increase the 



— 265 — 

now generally low profits, would lead to an expansion of 
production, while others maintain that a reduction of wages 
and fixed incomes would reduce purchasing power and demand 
and thus intensify the depression. _ 

In an analysis of this very difficult problem, it seems essential 
to distinguish clearly between changes in the distribution of 
income or purchasing power on the one hand and changes in 
the total volume of purchasing power used to demand commodi- 
ties and services on the other. If it is assumed, in other words, 
that the total purchasing power used to buy finished consumers' 
goods and producers' equipment is independent of fluctuations 
in these price and cost items, then a reduction in the prices 
of finished goods which are now subject to monopolistic control 
would increase the demand for them and lead to greater pro- 
duction. This is true both of consumers' goods and investment 
gQO&s — i.e., durable consumers' goods and equipment. The 
'increased output of these commodities would involve an increased 
demand for raw materials and for labour and the volume of 
economic activity in genera] would thus be increased. 

It is much more uncertain to what extent a reduction in the 
various items which enter into the costs of production of finished 
commodities — that is to say in the prices of raw materials and 
wages and interest rates — would have similar effects. In the 
first place, the effect of cost reductions on the prices of finished 
commodities varies. Certain cost elements have a much less 
direct influence than others on the price at which the producer 
is willing to put an extra unit of goods on the market. Overhead 
costs, which do not vary with the volume of output, are among 
those which, in the short, run, are likely to have little, effect on 
selling price. Some of these overhead costs are fixed by loug-terni 
contracts — for instance, the interest on bonded loans and certain 
salaries ; during bad times they are not fully covered and their 
reduction might merely involve a change in the distribution of 
income to the advantage of the manufacturer and have no 
effect on selling-price. In the short run, their influence on selling- 
price is. as a rule, insignificant compared with that of the variable 
costs which change with the volume of output — for instance, 
wages of manual labour, the cost of raw materials, power, etc. 
Production naturallv ceases unless variable costs are covered. 
As even during a "business depression selling-prices both in 
manufacturing industries and elsewhere are generally much above 
these variable costs, it is not at all certain to what extent their 
decline would lead to a corresponding reduction in the prices 
of the goods produced. 

It is probable, however, that in many cases a reduction of 
the variable costs would lead to a corresponding reduction in 




— 266 — 

T, H fhf PriCeS ' p S 0t . her words > if Lhese costs are half as high 
as the pnce of the fia&hed commodity, were they re luced bv 
10 per cent prices might fall by 5 per cent. Thus if the amount 
of money used for the purchase^ of «SiJffit£EStaW CgJ 

oy £» per cent. Under other conditions of demand it mmht 
mcrease more or less, but any difference would I off et bv a 

S^cSwould d S and f °n ° ther «***»*«** Such a rSln Son 
oi costs would increase the incomes of the manufacturers whn 

*S£toh£% l ° * m \2™ ta ™ ,ume of conmmdfe 'whh 
££j£3? On SHS b t Wet ; n sema g~Prf^ and the variable 
of raw nS^?i Sf fifr^ wa g e " ea ™ers and the producers 
ol raw materials would lose. Only if the prices of the finished 

cX\tnM the r n redllCed ** ^ T* P**^*tta vSie 

2 s ™ 1 t,u " Kme y "comes of the wage-earners as a whole 

and entrepreneurs as a whole remain as before ; the reduction 

in wage rates and prices would be offset by a larger volume 

and Sa nf eS sn and i ^P 10 ^- X* real income of thX ZS 
and of society in general would be larger than before. 

Table VIII. — /ndices o/ Building Costs. 

Monthly Average of first half of Year 

(1913 = 100.) 



Germany 



1928. 
1929. 
1930. 
1931. 



United States 



173 
174 
176 
148 



198 
204 
202 
199 



206 
207 
207 
193 



ItaA&flroSi ° f ; h V Ilf ! uence of ^st reductions can be 
louncl in the building trade, because almost all costs in this 

£?i5n r" abIe " Reduction in the prices of building ma ?e, 
and builders wages would make houses cheaper Hence a 
given sum of savings would be sufficient to finance the construction 
of^arger number of houses. That the costs ^cSmclum 

Engineering News Record. 



— 267 — 

have shown relatively little flexibility during the present depres- 
sion, as seen from the table above, is a fact which deserves 
special attention. Iron and steel, cement, glass and bricks have, 
in several, although not by any means in all, countries, fallen 
very little in price, largely because they are to an unusual 
degree subject to monopolistic regulation. 



Table IX. — Indices of the Costs of Building Materials. 



Germany 


April 
1929 


April 
1930 


April 
1931 


June 
1931 


Stone, etc 


100 
100 

too 

100 


101 

100 

97 

100 


70 
90 

71 

80 


78 


Structural steel 

Building timber ...... 

Total building material 


92 

70 
79 



Italy 



July 
1929 



July 
1930 



July 
1931 



July 
1931 



Bricks, common, Milan 
Tiles, Milan ..... 
Cement, Milan .... 



100 
100 
100 



60 
83 
90 



49 
70 
84 



48 
71 

84 



United States 


May 
1929 


May 
1930 


April 
1931 


May 
1931 


Brick house, 6 room . . . 
Frame house, 6 room . . 
Brick, common, New York 
Cement, Portland .... 




100 

100 
100 
100 


99 
100 

93 
97 

100 
100 


92 
88 
91 

85 
87 
83 


92 
90 
91 

84 


Lumber, composite . . . 
Structural steel beams . . 


81 
83 



In the United Kingdom, the price of cement has remained 
unchanged from the summer of 1929 to the summer of 1931. Fur- 
ther, the prices of building timber and of bricks in London 



1 Sources : Germany : V ierlelj ahrsheft zur Konfunklurforschung ; Wirtschafl und 
Slalislik, July 1931, 1st Vol. 
II illy : Bolletino dci Prezzi. 
IJnllcil Sliilrs: Survey of Current Business. 



— 268 — 

have been kept stable since the middle of last year (earlier 
information not published). 

Building wages have dropped very little. Nominal wage rates, 
which, however, do not accurately reflect actual earnings, have 
remained practically unchanged in Australia, the United Kingdom, 
Italy and the United States from 1929 up to the spring of 1931 ; 
in Germany and France, they have even shown some increase. 

On the basis of the above reasoning a tentative conclusion 
can be reached that, had building costs dropped radically in 
1930, Ihe chances of a considerable building activity during 1931 
would have been increased. This question is further discussed 
below. 

Although it is more uncertain to what extent cost reductions 
in other industries would lead to price reductions and an increased 
volume of production and employment, there can be no doubt 
that, if the assumption made above regarding the maintenance 
of total purchasing power is correct, the tendency would he the 
same as in the building trade. 

Before analysing the validity of this assumption certain quali- 
fications must be stated and the special problems which arise 
in connection with retail prices briefly discussed. 

As already indicated, reductions fn various cost and price 
items would," under certain conditions, lead to considerable 
changes in the distribution of income between different classes 
of society. This would entail a corresponding change in the 
direction of demand. For instance, wage reduction unaccompanied 
by an increase in employment sufficiently large to maintain 
unaltered the total income of the working "classes would reduce 
the demand for goods consumed by these classes, and increase 
the demand for goods required by farmers and other social 
groups. While such a change might be important from the 
point of view of social policy, it would probably have little effect 
on the volume of production for, in view of the substantial 
surplus capacity existing in all branches of industry, a shift 
in demand from one class of goods to another would not reduce 
output in one branch more than it increased it in another. 

It may be added that a reduction of certain costs and prices, 
if undertaken by one country alone and not by others, would 
increase the competitive power of the export industries of that 
country and thus have a greater effect on the volume of sales and 
employment than if the same policy were simultaneously adopted 
in all countries. 

The flexibility of retail prices seems to have been relatively 
small in spite of the comparative absence of monopolistic regula- 
tion in the retail trade. The maintenance of fixed prices of certain 
branded commodities has been due largely to regulation by 



269 



inanul'at'i urn s, not by retail traders. A considerable amount 
of friction, however, scums to have prevented retail prices from 
dropping as innrh, 01 as fast, as the decline in wholesale prices 
would justify. It is true that ir the retailers' margin is fco be 
kepi ini.iel or reduced only as much as wage rates in manufac- 
turing Industries, Hie percentage decline in retail prices cannot 
be as great as in wholesale prices. There is reason to believe, 
however, thai retail prices have declined so slowly that the 
margin between the wholesale and retail prices ol identical 
commodities on a lmvch day is somewhat greater than it was. 
Ill oilier words, Ihe retail price of lo-dny is based on I lie wholesale 
i)i ice ruling some I ime ago. 

This Increased margin has very much the same ellecl on the 

volume ol sales and production as woidd resull from a forcing 
up of wage rales during Ihe depression, Ol Ihe raising of whole- 
sale prices by agreement between produce! s. If retail prices 
dropped more, a larger quantity of finished commodities would 
be sold and produced. This Is entirely compatible with the 
assumption that total national incomes in terms of money would 
nol necessarily be further reduced by increased flexibility, as 
whatever reduction in the incomes of retailers took place might 
be offset by increased incomes for wage-earners and manufactu- 
rers as production rose. 

But no answer can be given to the question with which this 
chapter is mainly concerned — ■ namely, that of the effect on the 
volume of production of greater flexibility in the price system — 
until an analysis is made of the assumption, introduced for the 
sake or simplification, that this greater flexibility would not 
reduce the total volume of monetary purchasing power m use. 

It has been explained above that during the present depres- 
sion the volume of savings has probably been larger than the 
demand for credit for investment purpose. Hence a part of the 
purchasing power has not been used at all, a fact which has 
tended to depress prices and reduce the volume of production. 
Obviouslv it is quite possible that a reduction of certain price 
and wage items might affect both the volume of savings and 
the demand for credit, 1 and thus weaken or strengthen the 
tenclencv towards a genera] decline in prices and production. 

Goods arc produced for sale at some future date. Hence 
producers in regulating the volume of their present output 



'This rxnression is used throughout the volume in a wi<k sens* Mid eoveis 
hut may only lend (o an Increase i" Us vciooly l*cc Um|>Ui VI "■>■ 



< 



— 270 — 

must consider the costs and Kcllmp-nrices , h .,, , 
opated in relation L(1 pi ,. S( , nt ffi nt , ™y Ik- an,, 

Of selling-prices ,1 is exlremrk, dilliciill for ,, ,7^ 

Wl opinion i .! isccrlnin. ,,„ ||,, oilier hand il ' lo r,,, "'« 

demons partly on their expectations tfStSfeSg ' S ' ** 

For instance, J a manufacturer of cotton «S* 
*f^ '" the Price of ra« cotton or in ^"nfh^JS?*? a 
h „f «P«< selhng-prices to follow a snnil 1!^, ' ( "^ 
will try in produce as little as possible -,t (,.-,■, llt ; he 
Thus, if there is a chance of llJSTc^totbH^f^ <osL 
mano/artum will tend [o restrict his , „ \ ■", ut «^ the 
for credit, '""I an and his demand 

Fmlher. irrespective of wfeal has just been s-mi it ; 
P^Wethai « eduction m wages or in the JX4rf e ?rtM? B 
materials or senu-manuhuUnvd commodities wumSSV** 
reduction n. the entrepreneurs' demand lor rm | . i' ' a 
reductions m.ghi reduce the consumption of thl^S^nT® 
and reduce rowuifactiaras' losses or Increase their JS 7 •*? 
would increase the sum of savines As i n! i P'oMs. which 
snppiv f Sf iu.s would *5H& X&ZSfeSjfiX 
capital market -- although a drop in interest Z°'. ,k ' 
Mine extent stimulate &nd -- P and noTali iZMJ !, 
be lent .The total purchasing power 'in nW^d KlI^MI 
a depressing effect on both prices and production '^ 

inus the direct stimulus to production nmvirl^t h. 

U begun, the volume ol investment'? £ tof ' &KX 

SsuSdKlfr b r"° nK ' lC5S ^ouraWc^V co S 
ta rftnl ',? contraction of investment is inevi- 

U is tine that little stimulus to investment is probable 






— 271 — 

while these costs are actually declining ; but when they reach 
rock-bottom a revival will be stimulated. The cost of building 
may be taken as an example. In many countries, the level of 
house rents made it profitable to construct residential buildings 
in 1929. Rents have since remained fairly steady. Had a conside- 
rable reduction in building costs been effected in 1930, an increased 
activity in this field would have proved profitable. Thus, not 
only would a greater volume of construction have been financed 
by a given quantity of money savings, but the total amount of 
credit used for construction, and consequently the total volume 
of purchasing power in use — e.g. in 1931, would have been greater. 

In the present depression, the demand for non-durable 
consumers' goods has been much better maintained than the 
demand for investment goods — i.e. durable consumers' goods and 
equipment goods. This must have been due to some extent 
to the failure of investment goods to decline in price as much 
as the former. Reductions in the prices of investment goods, 
especially when unaccompanied by corresponding reductions in 
the level of costs and prices in other industries, tend to stimulate 
the demand for such goods ; the demand for credit and the 
volume of purchasing power is thereby increased. For instance, 
a reduction in the wages of manual and other labour in the 
machine industry unaccompanied by a similar reduction in 
other industries, would make it profitable to substitute machinery 
(now reduced in price) for labour in other industries. A reduction 
of monopolistic prices — for example, those of iron and steel — 
which enter into costs in the investment trades would have the 
same influence. Obviously, the tendency to increased investment 
which such a reduction would avoke would be much weaker if 
costs fell all along the line, as the substitution of machinery 
and other investment goods for labour would then be 
less profitable. On the other hand, in some industries cost 
reductions might revive profits sufficiently to stimulate invest- 
ment for the purpose of increasing capacity. Which of these 
two tendencies is on the whole the stronger it is difficult to 
judge. It would appear to depend on Lhe circumstances in each 
individual case. It should be added, however, that an expec- 
tation of a future rise in the general wholesale price level, which 
also stimulates investment, would be weakened by a general 
reduction of costs. Recovery of business might then restore 
the balance between costs and prices at a much lower level 
than that existing before the depression. 

Thus the facts that the prices of materials for producers' 
goods have been better maintained than those of materials for 
consumers' goods, and that wages in the investment trades have 
failed lo decline in relation to wages in other industries in spite 




— 272 — 

of demand having fallen off more in the former than in the latter, 
tend to discourage a revival of investment which would exercise 
a stimulating influence oil business in general. This discouraging 
influence has probably hcen strengthened in 1931 owing lo the 
fact that many business men have been expecting that the 
resistance to price and wage redactions in certain investment 
trades would break down and have accordingly postponed action. 

It is sometimes suggested that an all-round reduction of 
wages and other costs tends to increase production and is a 
necessary condition of recovery, as it makes for a better 
balance between costs and selling-prices. But during a severe 
depression the volume of output is small, overhead costs are 
heavy, and average costs per unit of output are therefore 
relatively high. Even substantial cuts in the variable cost 
elements, such as wages and raw material prices, would in most 
industries fail to reduce average costs to the level existing when 
business conditions were good. Even if they did, production 
would nevertheless be unprofitable as long as prices of finished 
goods are seriously depressed, as at present. In many in- 
dustries, variable costs would have to come down almost to 
nothing if average costs were to fall below the present prices. 
Reductions of such magnitude do not appear to have taken 
place during earlier depressions. Experience shows that recovery 
starts at a time when profits are low, and that it is the increase 
in the volume of output that makes production again profitable. 
As long as prices are well in excess of variable costs, any increase 
in output will of course benefit the producer. 

The interest level is also an item of fundamental importance 
in the cost of real investment. Whether a certain investment — 
for instance, the construction of residential buildings — is 
profitable or not, depends, not only upon the cost of production 
of the houses, but also upon the amount of the annual interest 
expenditure involved. Reduction of both building costs and 
interest costs by 20 per cent would make possible a fall in the 
annual rent by almost 36 per cent. In the same way, the purchase 
of very expensive machinery which can be used for a number 
of years is the more profitable the lower the rate of interest. 
Hence the failure of the long-term rate of interest to decline 
substantially is one factor which has tended to reduce the volume 
of investment and to intensify and prolong the present depression. 
The causes of this failure of interest rates to drop have been 
briefly examined above in Chapter V C. 

The influence of high taxation on the volume of production 
has been much less easy to determine. Unless a decrease in 
taxation — rendered possible, for example, through a drop 
in the interest on public loans or reduction in the wages 



— 273 — 

and salaries of public officials — affects total purchasing power, 
it merely involves a change in the distribution of income. There 
will be no increase in the volume of services performed by these 
officials in question corresponding to the increase hi sales resulting 
from retail margins. On the other hand, a relative reduction of 
taxation on industry in a given country tends of course to increase 
the competitive power of this country. Other things being 
equal, it tends to increase the volume of sales and of output. 
It has only been possible in the present section to examine 
certain aspects of the problem of the forms of flexibility and 
inflexibility which mitigate or intensify economic depressions 
and to draw a few tentative conclusions. The, present economic 
system is based on adjustments through changes in the prices 
mechanism. Into this mechanism, elements of rigidity have 
been introduced, which affect and to some extent impede its 
working. It is not improbable that, under such conditions, the 
resistance of the economic system towards depressing tendencies, 
such as have operated in the world in the last two years, has been 
reduced and that the system has lost some of its power of recovery. 
On the other hand, as already observed, in certain circumstances 
rigidity of prices and wages" may have a favourable influence. 
Scientific analysis of this problem, however, and indeed of the 
whole problem of business cycles, is still at an early stage. 



IH 



Chapter VII. 

COMPARISON WITH EARLIER DEPRESSIONS. 



In the present chapter it will only be possible to discuss 
a few aspects of previous periods of depression concerning which 
information is available. In the absence of comprehensive 
world figures regarding pre-war business conditions, Lhis discus- 
sion will necessarily be confined largely to conditions in the 
limited number of important countries for which material 

GX3Sts» 

It may be convenient first Lo compare the general movements 
of production, trade, prices, and money rates during the various 
depressions, and later to examine in what important respects 
the present depression resembles or differs from each of the 
major trade depressions of the last sixty years. 

Volume of Production. 

The lack of data, especially the lack of monthly figures makes 
it difficult to make the necessary comparison of changes in 
production. 

Before the war, pig-iron production was regarded as of primary 
importance for a study of business cycles. However, as observed 
in the last chapter, the relative importance of pig-iron in indus- 
trial production is now less than it was before the development 
of electrical, engineering and other industries using large quan- 
tities of non-ferrous metals. Again, figures for pig-iron output 
naturally fail to reflect changes in the activity of the chemical 
industry and a number of other industries which have become 
increasingly important in recent decades. The changes in 
this particular series show the tendency of the movement in 
industrial production rather than its intensity. 



— 275 — 

The output of pig-iron in six important producing countries ] 
dropped by 8 per cent from 1873 to 1874, 10 per cent from 1883 
to 1885 and 6y 2 per cent from 1890 to 1892. The drop was 
negligible between 1900 and 1901 (}4%) m the six countries taken 
as a whole, but it amounted to 10 per cent in the five European 
countries considered. From 1907 to 1908, the decline was no 
less than 23 per cent, from 1920 to 1921 43 per cent and from 
1929 to the first half of 1931 about 40 per cent. Except in 
the last case, the above percentage figures measure the changes 
between the year of the highest and that of the lowest output. 
In all the earlier depressions except that of the eighteen-eighties, 
the lowest level of output was reached in the year after the crisis. 
In other words, some recovery began to take place during the 
second year. The recent decline in pig-iron production has 
not only lasted longer than in any of the previous depressions, 
but from the available figures for 1931 it appears that the 
reduction in output is greater. 

The output of coal has declined during the various depres- 
sions to a very different extent from country to country. In 
I he world as a whole, the reduction during the pre-war depressions 
was insignificant, but the failure of coal output to rise was 
equivalent to a relative contraction, as in the pre-war decades 
I he long-period trend of coal production was rising. After the war, 
I here has been no such upward trend. The importance of coal 
has altered in the course of recent decades as a result of the new 
technique of generating power, and the changes in coal output 
have been considerable. The decline in the world output of 
coal from 1920 Lo 1921 was more severe than in the present 
depression, though in several countries the relative decline 
has been greater in the last two years. 

The textile industry of the most important producing countries 
has not been as seriously affected as during certain previous 
depressions. In the United Kindom, the volume of imports 
nl' ia\v cotton retained for home consumption declined 

by 6 per cent from 1874 to 1875 ; 

by 18 per cent from 1884 to 1885 ; 

by 14 per cent from 1907 to 1908 ; 

by 40 per cent from 1920 to 1921 ; 

by 22 per cent from 1929 to 1930. 

In France, Hie textile production index tell by 3 per cent 
from 1900 to 1901, 10 per cenl from 1920 lo 1921 and 8 per cenl 
I i 1929 Lo 1930; the available figures for 1931 point lo a 

- . 1 ■ ,■ • I ■ I I'll r I her drop. 



I 'nihil Kingdom, I'iniirr. I iri'iiiiinv. Belgium, Sweden, llnilcil Sl.nl 04 



— 276 — 

The weight of German imports of cotton declined by about 
one-tenth from 1874 to 1875, and minor declines of about 5 per 
cent occurred between 1883 and 1885 and between 1907 and 
1908. During the present recession the reduction has been greater ; 
the index of production in the German cotton industry dropped 
by 12 per cent between 1928 and the first half of 1931. 

A comparison of the production of investment goods is 
difficult on account of the inadequacy of the statistical material. 
The building index of the Statististique generate provides a 
basis of comparison for France. It shows a reduction of about 
7 per cent between 1901 and 1903 and of 15 per cent between 
1905 and 1907 and again between 1920 and 1921. Building 
activity rose in 1930, but declined about 7 per cent in the first 
half of 1931. 

A much more serious contraction of building activity 
has been experienced in the United States. While the value 
of building contracts declined by about 11 per cent ten years 
ago and between 1906 and 1908 by 20 per cent, the reduction 
during the present depression has been as follows : 

14 per cent between 1928 and 1929 ; 

32 per cent between 1928 and 1930 ; 

52 per cent between 1928 and 1931 (5 months). 1 

In each of the three major depressions of this century, building 
in the United States began to recede in the year before the turn 
in business. In other countries also, the turn in building acti- 
vity took place one or two years before the crisis. 

In shipbuilding there has been a considerable decline in 
activity in the last two years, although so far rather less than 
during some earlier depressions. A sharp contraction has, however, 
taken place in 1931. 

For a comparison between the two post-war crises in the 
U. S. A. a large mass of material is available. A comparison of 
the indices of production gives the following result. In the 
United States the volume of industrial production measured 
by the index of the Federal Reserve Board declined by 23 per 
cent between 1920 and 1921 and by 18 per cent between 1929 
and 1930. Monthly figures (seasonal variations eliminated) 
show a greater decline — 29 per cent in the nine months following 
June 1920 and 32 per cent between June 1929 and December 
1930. IL thus appears that the volume of production in the 
United States has receded more during the present depression 
than nine years ago. 



Federal Reserve Board index of contracts awarded. 



— 277 -— 

The production indices available for other countries as a 
rule cover too short a period to allow of any comparison with 
previous depressions. Further the various production data to 
which reference has been made above are insufficient as a 
basis for any adequate statistical comparison between the 
present and past depressions. They would appear to suggest, 
however, that the i-ecent decline in production, though in some 
cases less than that recorded in 1920-21, is on the whole 
greater than that which occurred during most of the depressions 
of the last century, as well as those of 1900-01 and 1907-08. 

The relative contraction of the value of the world trade 
between 1929 and 1930 has been unprecedented, as may be seen 
from the following table : 

from 1873 to 1874 — 5 per cent 

from 1883 to 1884 — 4 per cent 

from 1890 to 1891 — 1 per cent 

from 1900 to 1901 + % per cent 

from 1907 to 1908 — 7 per cent 

from 1929 to 1930 — 15 per cent. 

Between the spring of 1929 and that of 1931, world trade 
would appear indeed to have contracted by about 40 per cent. 
It should, of course, be kept in mind that the decline in prices 
has been relatively great during the present depression. There 
can be no doubt however that the quantum of trade had also 
dropped more than on earlier occasions as already pointed out in 
chapter V. D. A comparison with the depression of 1920-21 is 
difficult on account of the instability of currencies after the 
war. 



Russian Production. 

As pointed out in previous chapters (VA and VIC), the 
position of Russia has been peculiar ; the quantity of her output 
has expanded to a remarkable extent during the past two years. 
It should be observed, however, that Russia has, within the last 
decade, experienced certain violent and serious trade fluctuations, 
although different in character from the business cycle. 

It is often thought that Russia's immunity to the business- 
cycle depression is a new phenomenon, due to the change in her 
economic system. This can only be partly true, as the prepon- 
derance of agriculture of a rather primitive form in her economic 
si rue I lire lias always rendered her largely independent of business 
fluctuations elsewhere. This also applies of course to other 
countries will) a similar industrial structure. 



— 278 



Prices. 

Every business-cycle recession for which statistical records 
are available has been marked by a decline in the general level 
of wholesale prices. This decline has been so regular a phenomenon 
that it is regarded by many economists as the most characteristic 
feature of economic depressions. The character of the fall 
in prices has of course differed in every case ; each cycle 
presents certain peculiarities which distinguish it from others. 
In order to compare fully the price movements of this and previous 
depressions, it would be necessary to make a more detailed study 
of the available data with regard to the latter than lies within the 
scope of this report. All that is attempted here is to point out 
some salient features of the fall in prices during the various 
depressions which have occurred since the last quarter of the 
19th century, and to direct attention to the outstanding points of 
similarity or dissimilarity with the present fall in prices. 

The data available for pre-war depressions which permit even 
of such general comparisons are very inadequate. In most cases, 
general price indices, when they exist, are given only as annual 
averages and do not therefore allow measurements of month-to- 
month movements, which are of particular interest in a period of 
rapidly falling prices. Further, the price indices constructed 
during the last century consist almost entirely of crude foodstuffs 
and raw materials, while those at present in use often include a 
wide selection of manufactured goods. Comparisons must 
therefore necessarily be rough. 

The character of the price declines in the depressions to be 
studied have varied considerably. Towards the end of the last 
century, when the long-time trend of the price level was downward, 
the fall in prices during a business-cycle recession appears to have 
been more marked than during periods in which there was a 
long-time upward trend of prices. The downward trend, 
which lasted from 1872 to 1896, was ushered in by a violent 
collapse in 1873. The ensuing depression continued until 1879, 
with only a brief recovery around 1876, and carried price indices 
to about half the figure they had attained in the preceding 
boom period. 

During the periods when prices were moving upwards, as they 
were between 1896 and 1913, the declines which took place 
during depressions were, as already mentioned, slighter. In the 
crisis of 1900 and 1907, for instance, prices fell considerably less 
than in either 1873-1875 or 1884-1886. During the depression 
in the early 'nineties, however, the price declive was in some 
countries very small. These facts are brought out in the 
following table, which shows the percentage decline in the general 
level of wholesale prices in four countries for which indices are 



— 279 — 

available. It has already been stressed above that the figures 
are more in the nature of estimates than accurate measurements. 
£ most currencies were on a paper basis during the ^ears 
immediately after the war, price changes between 1920-1922 nave 
SnSce somewhat different from price changes during other 
dSSS and have therefore been omitted from the tables 
which follow. 

Table I. — Percentage fall in Wholesale Prices. 1 
(Annual averages of years shown.) 



United 
Kingdom 



Statist 



France 



Germany * 



Statixtiqtjf! 
Ginerate 



From 1873 to 1875 

From 1891 to 1893 

From 1900 to 1902 

From 1907 to 1908 

From 1929 (first half) to 1931 
(first half) 



14 
5 



— 28 



10 
4 
5 

7 

24 



Wirtschojl 
u.Slalislik 



U. S, A. 



Bureau of 
Labor 

Statistics 



13 
18 

7 
6 

17 



— 7 

— 7 3 

— 2 4 

— 4 

— 24 



In so far as reliance can be placed on the price indices for the 
19th century, it would appear that the present fall in prices is 
moro sever? than any experienced during the depressions in 

the last half century before the war. ^^n n f the 

It would be of interest to compare also the duration or the 
decHne in prices, but unfortunately monthly data for ■ ti* e *Hv 
periods are not available. During the long gnfid to of fallrag prices 
the rapid fall seems, however to have lasted longer than during 
periods when prices were normally moving »P^ ards ; . iqn7 
1 The present price decline has lasted longer than that : of 190- - 
1908 or that of 1920-1922. Prices in most parts of the world have 
now beei falling almost three years and ^«gffi*5» 
months- in 1907-08, prices fell for less than a year (in the United 
Stages on"y for four months) and then turned upwards, while m 

Wirlsclmll). 
« 1S1I2. 

* mill. 



— 280 — 

1920-21 they fell in the United States for 20 months and in 
many other countries for a similar or somewhat longer period — 
in certain countries, however (i.e., those which continued to 
inflate their currencies), the duration was considerably shorter. 
A more trustworthy measure of the relative severity of price 
declines in various periods than that afforded by the general 
indices is to be found in the price movements of individual 
commodities. In the table which follows is shown the fall in 
prices of several important commodities in Germany during the 
major depressions of the last half-century. In each case the decline 
is measured from the highest point preceding depression to the 
lowest point preceding revival. 

Table II. — Percentage Fall in Commodity Prices in Germany. 





Coal 


Pig- Iron 


Copper 


Woo] 


Cotton 


Hides 


1884-1886 . . . 


36 


49 


46 


42 


33 


36 


1893-1895 . . . 


44 


47 


48 


37 


55 


22 


1902-1903 . . . 


9 


37 


33 


36 


41 


8 


1908-1909 . . . 


4 


19 


49 


22 


32 


28 


1929-1931 ! . . . 


9 


5 


48 


56 


47 


50 



It is obvious that the present decline in prices, even if measured 
only to the beginning of 1931, has been more severe than in the 
previous depressions for all commodities included in the above 
table except coal and pig-iron. The most noticeable contrast with 
the crises of the 19th century lies in the behaviour of coal and 
iron prices. Previously, these commodities were extremely 
sensitive ; their prices generally rose and fell before commodities 
in general and fluctuated more widely. With the cartellisation of 
the coal and iron industries towards the beginning of the present 
century, however, the price fluctuations became much narrower. 
In the present depression, coal has fallen relatively little in price 
compared with most other commodities ; on many domestic mar- 
kets it has remained practically unchanged and on some it has 
risen. 

Prices in France have moved in very much the same way 
as in Germany. It is noticeable that in both countries wheat 
prices have been maintained at a fairly constant level in the last 
few years through tariff increases and other official measures. 



1 Average of 1929 compared with the average of the first half of 1931. 




— 281 



Table III. — Percentage Fall or Rise in Commandity 
Prices in France. 1 



From — to 


Wheat 


Cotton 


Si! It 


Iron 


Coal 


1873-1875. . . 


— 27 


— 24 


— 23 


— 25 


— 26 


1890-1892. . . 


— 29 2 


— 28 


— 15 


— 15 


— 24 


1900-1902. . . 


— 3 


— 8 


— 10* 


— 20 


— 25 


1907-1908. . . 


+ 9 


— 14 


— 32 


+ 7 


— 9 


1920-1921 . . . 


— 59 3 


— 58 


— 39 


— 65 


— 70 3 


1929-1931 5 . . 


-4- 23 


— 43 


— 51 


— 38 


+ 1 



The price movements of important groups of commodities 
in the United Kingdom during the present and past periods of 
depression may also be compared : 

Table. IV. — Percentage Fall or Rise in Commodity Prices in 
the United Kingdom. 6 





Vegetable 
Food 


Animal 
Food 


Minerals 


Textiles 


1873-1875 .... 


— 12 


— 1 


— 28 


— 15 


1891-1893 .... 


— 21 


+ 4 


— 11 





1900-1902 .... 


+ 2 


+ 2 


— 21 


— 8 


1907-1908 .... 


+ 1 


+ 1 


— 18 


— 20 


1929-1931 7 .... 


— 29 


— 14 


— 21 


— 51 



These indices confirm the opinion that the present decline 
in prices is, on the whole, -more severe than in any of the 
major pre-war crises. Vegetable foodstuffs declined in price 
during the long depression periods in the last century, but not 
during the short depressions before the war. It should be 
observed, however, that, not only in 1901 and 1908 but also 
in 1891, the price of wheat was higher than during the preceding 
boom year. Even in 1874 it was maintained on a relatively high 
level, as may be seen from Chart 39. 



1 Source : Bulletin dc la Siatistique Generate de la France. 

2 1891-1893. 

3 1920-1922. 
1 J 900-01. 

B Average of I lie firsl half of 1931 compared with the average of 1929. 

• Sources : Tim Statist (for 1929-31). Journal of the Royal Statistical Society. 

' FilS I Half of 1929 and firsl of half 1931. 



282 — 



Chart 39. 



Wholesale Prices or Minerals and Vegetable Food, 1867-1913. 
(Index of Sauerbeck and The Statist.) 



140 



120 



100 



80 



M/NEQAUX 
MINERALS' 

PQOO. ALIM. OOQIG/HE VE6ETAIE 
VEGETAaiE FOOO 




mTm 69 1870 71 72 73 74 75 76 77 18 79 IBBff 61 



60 




J882H — 64 85 86 67 88 89 1690 9t 92 93 W 05 96 97 



100 



80 



60 




j j_ 



99 1800 01 02 03 0+ 05 " 06 07 08 09 1910 II 12 13 

s a ■*■ r^g-j j .is. 






Source : Journal of the Royal Statistical Society. 
The Statist. 



— 283 — 

The output of cereals fluctuated quite differently from activity 
n manufacturing industries as reflected in pig-iron production. 
Such facts lend no support to the theory that variations in the 
volume and value of crops are the cause of the business cycle. 
They do, however, indicate that it is not a mere accident that 
periods of depression have been brief when agriculture has been 
prosperous and the purchasing power of farmers well maintained. 
Moreover, when both agriculture and manufacturing industries 
happen to be depressed at the same time, the recession tendencies 
strengthen one another. 

Of all commodities, minerals have dropped the most con- 
sistently and severely in price during depressions. After the 
crisis of 1873, pig-iron and coal prices fell by about one third ; 
in more recent pre-war depressions they became somewhat less 
sensitive, and often (as e.g. in Germany and France during 
the present depression) non-ferrous metals — e. g., copper and 
tin — fell as much or more than these commodities. In 1908, for 
example, pig-iron fell in price in England by about 10 per cent 
and coal even less, while copper fell by some 30 per cent, lead 
slightly less and tin by 23 per cent. 

It has been shown in Chapter V — B above that during the 
present depression the prices of raw materials have dropped 
more rapidly than those of manufactured products. This pheno- 
menon is not peculiar to the present crisis, but is one which is 
observed in all other periods of depression for which information 
is available. It was especially marked in 1920-1921 ; in the 
latter year the Swedish official price index for finished products, 
for example, stood 27 per cent higher than the index for raw 
materials, and the National Bureau of Economic Research price 
index for manufactured goods in the United States stood 33 per 
cent above the index for raw materials (both groups of indices 
are based on 1913). As recovery from the depression took place, 
the margin between the indices gradually narrowed. During 
the depression of 1907-08, raw materials dropped in price by 
11 per cent in the United States, while manufactured goods fell 
by 8 per cent. 

Particular attention should be drawn to the differences 
between the price movements of producers' and consumers' 
goods in this and previous depressions. It has been shown in 
Chapter VI — D above that the decline in the prices of producers' 
goods during the present depression has on the whole been 
considerably less than in the prices of consumers' goods. The 
available evidence suggests that this is contrary both to the 
experience of 1920-21 and to pre-war experience. In 1921, the 
Nation&l Bureau of Economic Research index for producers' goods 
fell by 39 per ccnl, while consumers' goods Cell by 30 per eenl. In 



— 284 — 

Canada, producers' goods (including materials) fell by 31 per cent 
and consumers* goods by 23 per cent ; producers' equipment, 
however, rose in price in 1921 and fell relatively little in 1922. 
Official indices for the United States of America and Germany 
show that, during the crisis of 1907-8, producers' goods in the former 
country fell by 15 per cent and consumers' goods by 7 per cent, 
while in Germany producers' goods fell by 24 per cent and con- 
sumers' goods by 9 per cent. The relatively slight decline in 
the prices of producers' goods during Ihe present depression 
is largely due to the fact that many raw materials for these 
commodities, in particular iron and steel products, have come 
more under the control of trusts and cartels, which attempt to 
maintain stable prices in good times and bad. 

Retail prices declined much less than wholesale prices during 
the depression of 1920-21 ; Ihe higher level of the former through- 
out the period 1922-1928 has been discussed in some detail in 
a previous section. Retail price indices during pre-war depres- 
sions are available for very few countries ; such indices as exist, 
however, uniformly indicate that retail prices either did not 
fall at all, or, if they did, did not fall as rapidly as wholesale 
prices. In 1908, for example, wholesale prices in the United 
Kingdom and the United States of America were about 10 per cent 
lower than in 1907 ; in England, the retail price index published 
by the Ministry of Labour was 2 per cent higher, and in the 
United States the retail price index of the Bureau of Labour 
was 3 per cent higher. Wholesale prices in England were, 
according to Sauerbeck's index, more than 5 per cent lower 
in 1902 "than in 1900, while retail prices were almost 2 per 
cent higher. 



Money Rates. 

The present depression has brought about a considerable 
decline in the rates of short-term money, A comparison with the 
previous crises shows, however, that this decline has not been 
greater than at certain periods in the past. The following table 
shows the average market rate in the year of the outbreak of the 
more important crises, the lowest subsequent annual average rate 
and the. percentage reduction between the two years considered. 

Although the table gives only yearly averages, it shows clearly 
that the present reduction hi money rates is not appreciably 
greater than that which occurred during various depressions 
in the past. Open-market rates have dropped by one-half and 
more on earlier occasions ; monthly figures of rates on the New 
York market show a decline of 75 per cent between June 1873 
and July 1874 (from 17 to 4.30 per cent), and of about 70 per cent 



— 285 — 

(from 6.25 to 2 per cent rate on commercial paper) between 
October 1929 and June 1931. 

Table V. — Open-market Rates during Earlier Depressions. 





London 


New York 


1873 


4.70 
3.14 


33 


10.25 
5.51 




1875 

Reduction in percentage . . 


46 


1890 

1892 

Reduction in percentage . . 


3.88 
1.76 


55 


5.66 
4.13 


27 


1900 

1902 

Reduction in percentage . . 


3.70 
2.97 


20 


4.35 
4.31 » 


1 


1907 

1909 

Reduction in percentage . . 


4.49 
2.28 


49 


6.37 
3.98 


37 


1920 

1922 ..... 

Reduction in percentage . . 


6.40 
2.65 


59 


7.12 
4.42 


39 


1929 (1st half) 

1931 (1st half) 

Reduction in percentage . . 


5.08 
2.39 


54 


5.80 
2.43 


59 



The absolute level to which interest on short-term capital has 
fallen during the present depression is, however, exceptionally 
low in certain countries. In recent months, the money rates 
have indeed tended to rise. 

The changes in discount rates are shown in the Table VI 
which requires no comments as the movement has been similar 
to that of open market rates. 

On the other hand, the yield of long-term capital declined 
very little. Years of declining long-term rates have in the past 
usually been followed by years of recovery in production and 
trade. On the other hand, some time before the turn in productive 
activity, bond yields have usually risen considerably. In the 
recent period of prosperity in the United States, bond yields 



' ['.I ■!. 



— 286 — 



Table VI. — Percentage Changes in Official Discount Rates 
during Earlier Depressions. 1 





France 


Germany 


Italy 


Netherlands 


United 
Kingdom 


1873-1875 . . 


43 






33 


48 


1890-1892 . . 


17 ■ 


29 





11 


47 


1900-1902 . . 


34 


38 





14 


16 


1907-1909 . . 


25 


35 


1 


40 


39 3 


1920-1922 . . 


8 


+ 32 


4 


5 


45 


1929 (1st half)- 












1931 (1st half). 


43 


24 


18 


55 


47 



rose from 4.37 per cent in 1928, which was the lowest level 
reached since the war, to 4.76 per cent in 1929 and, although 
they have since declined, the low figure of 1928 has not again 
been reached. 

Table VII. — Bond Yields during Earlier Depressions. 4 



| United Kingdom 


u. s 


A. 


Denmark 


1873 

1875 ...... 


3.28 
3.24 

1.2 


" 


4.35 


Reduction 

tage . . 


in per- 


4.33 




0.5 


1890 . . . 
1892 . . . 
Reduction 
cent age . 


in per- 


3.02 

2.45 

18.9 


— 


3.70 6 
3.58 

3.2 


1900 . . . 
1902 . . . 
Reduction 
cent age . 


in per- 


2.92 6 
2.75 

5.8 


4.15 
4.06 


2.2 


3.79 
3.55 

6.3 



1 Sources : Bulletin de la Slatistique generate de la France (1873-1922). 

League of Nations : Monthly Bulletin of Statistics (1929-1931). 

2 1891-1893. 

3 1907-1908. 

* Source : Standard Statistics. Dr. Pedersen : Forholdet mellemRenten af Laan 
Venn rt ° g Iang l0betid J P erloden 1855-1930, 0konomi og Politik, November 

s 1891-1894. 
6 1901-1903. 



Table VII. 



— 287 — 

Bond Yields during Earlier Depressions. 
(continued). 





United Kingdom j U. S 


A. 


Denmark 


1907 

1908 

Reduction in per- 
centage 


2.97 
2.91 


2.0 


4.51 1 
4.33 


4.0 


3.70 2 
3.68 

0.5 


1920 

1922 

Reduction in per- 
centage ..... 


5.32 
4.42 


16.9 


5.88 
4.94 


16.0 


6.22 
4.94 

20.6 


1929 (1st half) . . 
1931 (1st half) . . 
Reduction in per- 
centage 


4.53 
4.29 


5.3 


4.67 
4.43 


5.1 


5.11 
4.66 

8.8 3 



The behaviour of the long-term capital market in countries 
not given in the table may be studied from the following tabic 
showing the changes in prices of fixed interest-bearing securities : 



Table VIII. — ■ Changes in Prices of Government Bonds. * 





France 


Netherlands 


Germany 


Italy 


1891-1893 


+ 7.0 6 


+ 6.3 


+ 2.0 


+ 1.7 


1900-1902 


+ 0.6 6 


+ 5.0 


+ 6.6 


+ 3.1 


1907-1909 


+ 3.1 


+ 3.5 


+ 0.5 


+ 2.1 


1920-1922 


+ 6.6 


+ 18.0 


+ 7.9 7 


+ 3.7 8 


1929-1931 ]0 ..... 


+ 15.1 


+ 4.0 9 


+ 5.6 


+ 7.5 



1 1907-1909. 

2 1908-1909. 

3 Yearly average 1929-1930. 

4 Sources : Statistique Generate de la France, Annuaire slatistique. 
6 1890-1892. 

6 1900-1901. 

7 1920-1921. 

8 1920-1923. 
■ 1929-1930. 

1(1 Average 1929 compared wilh I lie liisi half of 1.931. 



288 



289 — 



It would appear that the years of the cheapest money did 
not correspond with the years of industrial recovery. The little 
that is known about the month-to-month development of pro- 
duction suggests that, as a rule, production began to expand 
when money rates were still tending downwards, while, 
after recovery had been in progress for some time, the price 
of capital also began to rise. Building activity was especially 
influenced by the behaviour of the long-term interest rates. 

The drop in the prices of shares, on the American and German 
markets at all events, has been more serious during the present 
depression than in any previous crisis. The index of share 
quotations on the New York Stock Exchange dropped 30 per 
cent from 1873 to 1874, 29 per cent from 1883 to 1884, 37 per 
cent from 1907 to 1908 and 41 per cent from 1920 to 1921 ; 
between 1929 and 1930 the drop was 60 per cent 1 . In Germany, 
prices of stocks dropped 22 per cent in the course of 1900 and 
14 per cent between April 1906 and August 1907 2 , while the 
decline from 1929 to 1930 (annual average) was 21 per cent 
and between April 1927 and June 1931 about 62 per cent. In 
France also, the recent drop in the prices of shares appears to 
be greater than during earlier depressions, although the yearly 
data allow of only approximate comparison. Between 1890 
and 1893 prices of shares on the Paris Bourse declined by almost 
10 per cent 3 , from 1899 to 1902 by 21 per cent, from 1907 to 
1908 by 5 per cent and from 1920 to 1921 by about 25 per cent. 
From 1929 to 1930 the decline was about 15 per cent 4 and 
continued in 1931. Between February 1929 and June 1931 
there was a decline in the prices of stocks of about 40 per cent 5 . 

At the moment of the break on the stock exchanges in 1929, 
there was no pronounced credit stringency accompanied by a 
rapid rise in money rates, such as occurred during certain of 
the previous crises, e.g. in 1873 and 1907. Not even in October 
and November of 1929 did money rates in New York rise as 
high as in 1907. This suggests that the organisation or the 
handling of the financial system has been improved. 

General Comparison with some Earlier Depressions. 

Certain points of similarity and difference between the earlier 
depressions and the present situation may now be briefly exam- 
ined. A comparison with the post-war crisis of 1920-1922 seems to 




1 On basis of figures compiled by the Federal Reserve Bank of New York. 

2 Vierteljahrshefte zur Konjunkturforschung 5.3. A. 

3 288 shares of all classes ; index of the Slatislique Generate de la France. 

4 300 shares ; index of the Statislique Generate de la France. 

6 The figure of 56 per cent quoted in Chapter V C represents the reduction 
in prices of industrial shares only. 






offer relatively little interest, as the early post-war years were a 
period of rapid readjustment of the economic organisation to 
peace conditions. For this reason the changes from the produc- 
tion and price levels of the war period have a somewhat different 
significance from the variations which occurred during other 
periods of depression. In view of these special circumstances 
ten years ago, it is surprising indeed that many fundamental 
production and price curves followed practically the same course 
as they have done since 1929, at all events up to the beginning of 
1931. Indeed, if an upward swing of the business cycle had begun 
in the spring of this year, the similarity would have been striking. 

Some fundamental differences must, however, be noticed. 
Most currencies were on a paper basis in 1920-1922, and the 
movements of wholesale price levels in different countries varied 
greatly. In many of them the fall in prices was short-lived and 
was quickly succeeded by a rapid inflation, which naturally 
affected the movement of business conditions in the countries 
concerned. For this and other reasons the severity of the depres- 
sion in the second year after the turn varied much more from 
country to country than at present. 

Another difference is that during the 1920-1922 depression 
the level of wages was in most countries rapidly adjusted down- 
wards. In some countries wages in manufacturing industries 
declined in the course of two years by as much as 30-40 per cent. 
The comparative ease with which nominal wages were then 
reduced was probably partly due to the feeling that a lower 
level of values in general was natural after the war and would 
prove permanent. 

In one respect the reduction of values was much greater 
ten years ago than it has so far been during the presentde pres- 
sion. The decline in bond yields was rapid, and in many coun- 
tries about twice as great as that which has occurred since the 
autumn of 1929. The large drop after 1920 naturally tended 
to stimulate real investment in residential buildings, new plant, 
etc. It is worth noting that the recovery in the investment 
trades (constructional trades, industries manufacturing pro- 
ducers' equipment and durable consumers' goods) appears to 
have begun very early during the depression and the need 
for real investment to have been great. In some countries indeed 
investment activity was interrupted for only a brief period. In 
the United States, for instance, the potential need for buildings 
was considerable and the number of building permits was increas- 
ing rapidly in the second half of 1921, many months before the 
long-term rate of interest reached its lowest point. In other 
countries also, the need for new real investment, partly arising 
out of the postwar economic reconstruction, seems to have 



id 



— 290 — 

been very large ; but rent legislation and other circumstances 
tended to discourage construction of residential buildings. 

If the present depression be compared with those of the 
pre-war period, certain differences are at once noticeable. The 
price system, as already mentioned in the last chapter, has 
been much less flexible in recent years. It is true that even 
prices subject to monopolistic regulation have come down consi- 
derably during the present depression, but the attempts towards 
control have much delayed this movement. Similarly, it is pro- 
bable that wages have fallen less between 1929 and the summer 
of 1931 than during some of the major pre-war depressions. 

In periods of depression before the war the reactions on 
prices were generally stronger than those on the volume of pro- 
duction or trade. The monopolistic tendencies prevailing since 
the war have naturally to some extent reversed this situation, 
as has been shown above with regard to iron and steel. 

In many other respects, of course, the post-war economic 
structure differs from that of the end of the 19th or the beginning 
of the 20th century. The extension of the social insurance 
system in the last two decades has affected the reactions of the 
labour market in most manufacturing countries. 

Another difference is that in agriculture capitalistic methods 
of production have been introduced to an increasing extent in 
most countries. Agriculture uses more mechanical appliances 
and is more dependent on conditions on the capital markets. 
It is therefore likely to be more affected by the business cycle 
than before the war. 

For Germany, the complete change on the capital market is 
of extraordinary importance. While Germany was, before the 
war, a capital-exporting country, able to reduce her net foreign 
lending during years of crisis and depression, her economic 
organisation is now dependent on foreign capital and has to face 
a reduction of capital imports or even a net efflux of capital in 
periods of crisis. 

In some respects there is a striking similarity between the 
present depression and that of the eighteen-seventies ; in both 
cases severe reaction followed a period of tremendous activity, 
especially in investment trades. They were both preceded by 
a period of marked technical progress and capital investment 
and by wars and monetary disturbances ; agri cultural prices 
fell more rapidly than prices in general ; the agricultural crisis 
in the seventies bears some resemblance to the present crisis 
at least as far as European agriculture is conserned. European 
agriculture in both cases was feeling the first adverse effects of a 
change in the world agricultural conditions. In the eighteen- 
seventies, as at present, there were fears of a gold shortage and 



— 291 — 

at the same time a series of monetary reforms which increased 
the demand for this metal. A sudden breakdown of important 
stock exchanges appears to have contributed to spreading the 
depression. The overseas countries like the Argentine, Australia 
and South Africa, however, seem to have remained relatively 
prosperous during the earlier crisis. 

In the 'eighties productive activity suffered no violent set- 
backs. Although the tendency towards falling prices had an 
adverse psychological effect, statistics show that economic 
progress during that period was very large, probably not much 
less than during other decades of the last half-century before 
the war. The fact that European agriculture was during the 
whole decade in a very depressed state did not prevent an expan- 
sion and prosperity in other industries. It is probable, however, 
that the volume of real investment in the 'seventies and 'eighties 
did not increase as fast as it did from the middle of the last 
decade of the 19th century. 

The boom of the'eighlies broke in 1890 under conditions of 
serious financial strain. Although some improvement took place 
in 1893, the peaks in the business curves of that year were very 
low. In the United States and the United Kingdom, they did 
not reach the line representing the long-term business trend. On 
the whole, therefore, the years 1891-1895 were one long period 
of depression. 

With the latter half of the decade a period of great prosperity 
began. There was a rapid growth of electrification. The output 
of non-ferrous metals increased rapidly; the network of telegraph 
and telephone communications was more and more extended 
with momentous consequences for business and conditions of 
life. Further, in many chemical industries a rapid expansion 
began which has since continued almost without interruption. 

The depressions which followed — those of 1900 and 1907 — 
were relatively brief. As already indicated, reductions in the 
volume of production were very small, although certain price 
series fluctuated a great deal. The variations in financial condi- 
tions were considerable. For instance, both short-term interest 
rates and stock-exchange quotations were subject to large 
fluctuations. The depression of 1900-1902 was less international 
in character than the others referred to in this chapter. For 
instance, it was felt very little in the United States, where a boom, 
after a brief interruption, continued up to 1903. 

With these brief remarks and certain observations made in 
earlier chapters as a background, certain special aspects of the 
various depressions of the last half-century may be examined 
which serve to Ihrow some light on the economic events of the 
last Iwo years. 






— 292 — 

Even the most pronounced depressions following upon 
violent booms have been followed by some recovery not later 
than two years after the turn, but in such cases recovery has been 
relatively weak and often followed by a new period of de- 
pression. In other words, the peak of the first business 
cycle after an exaggerated boom has in. several cases been 
submerged. This was the case, for instance, with the revival of 
1876, which was unable to relieve to any considerable extent 
the depressed business conditions of the period 1873-1879. 
Similarly, as already indicated, the depression after 1890 lasted 
for about five years. The course of events was quite different 
after the post-war depression of 1920-1922, which was followed 
by a period of re-organisation and large capital investment. It 
is not improbable that the possibilities of rapid expansion in 
investment trades in the last decade explains the relatively rapid 
recovery of business. 

The course of the various depressions has been largely 
influenced by the character of the boom periods which preceded 
them. When a fairly long period of very large investment precedes 
the crisis, as for instance in 1873 — in other words, when 
investment has reached a certain temporary saturation point 
and, in the absence of a considerable decline in long-term 
interest rates, there is no demand for large new investments 
which might bring about a revival of business — the depression 
is likely to prove especially intense and protracted. On the 
other hand, if the turn of the business cycle comes before such 
a saturation point is reached, the unsatisfied need of investment 
will stimulate a recovery in the industries producing investment 
goods relatively quickly, and thus tend to cut short the depres- 
sion. On the whole, conditions which make for stability of 
investment tend to smooth out the business cycle, while 
exaggerated investments during certain periods, or other circums- 
tances which make it difficult to maintain the volume of 
investment, have the opposite effect. This is one reason why 
fluctuations in business conditions after great wars appear to be 
relatively great. 

The more uniform and worldwide character of the present 
depression as compared with earlier depressions seems to be due 
partly to the fact that the world has become more of an economic 
unit — a fact which has already been stressed several times. 
A comparison with earlier cycles also serves to emphasise the 
influence of political difficulties and political instability during 
the last few years. This factor has been of particular importance 
in connection with the weakness of the tendencies making for 
recovery in the summer of 1931. This question will be discussed 
in the next chapter. 



— 293 — 

It would be superfluous to summarise here all the various 
circumstances which have contributed to the exceptional severity 
and long duration of the present depression. The. importance of 
two of them stands out very clearly. Agriculture became involved 
in a crisis at about the same time as industries producing raw 
materials and manufactured goods and, owing to the general 
financial mstability, the repercussions of the unfavourable condi- 
tions in countries" producing primary products have been very 
great. Secondly, the present depression, like Lhat of 1873, was 
preceded by a long period of extraordinary activity m real 
investment, and in many directions a temporary saturation point 
had been reached bv the time the business cycle turned. For 
this reason, the demand for new investment is now relatively 
small ; recovery in this field has been made all the more difficult 
owing to the influence of incomplete flexibility of certain price 
and cost elements, for example the long term rate of interest. 
The first of these factors appears to have been largely respon- 
sible for the rapid spread and intensification of the depression ; 
the second for the weakness of the forces making for recovery 
and thus for the long duration of the depression. 

Forces making for Recovery during Earlier Depressions. 

A study of the circumstances which appear to have brought 
about recovery after earlier severe depressions may suggest 
where signs of improvement in the present situation should be 
looked for and even perhaps what measures might contribute 
to such an improvement. 

The factors which would appear to have been in some way 
connected with the recovery after such depressions are as 
follows : 

A. Factors making for increased production without necessa- 
rily increasing purchasing power in use. 

1. Stocks of commodities may be reduced owing to a greater 
decline, in production than in consumption during the period 
of depression. When stocks cannot be further cut down, purchases 
bv retailers and others must keep pace with their sales and 
thus increase somewhat. Production is thereby stimulated and 
the increase in purchases may help to create a revival of 
optimism, which, in its turn, stimulates production. 

2. A reduction of commodity prices accompanied by, or 
even occasioned by, a reduction in production costs may make 
it possible In huy a larger quantity of commodities with a given 
sum of money. Lower prices of certain raw materials and lower 



— 294 — 

JSKt^H m f de [ - P ° S ? iLle t0 finance lat S er ^vestment with 
a gtven sum of savings, just as lower retail prices have enabled 
consumers to buy more consumers' goods. In other words 
price reductions have sometimes led to larger sales and increased 
production ol commodities. It is impossible, howevo to saj 
with certainty whether this has taken place or not on any parti- 
cular occasion As explained in Chapter VIE, cost and price 
reductions will have an effect of this sort only when the y fail 
on H Zl f 01 " 1 P urcha f in g P°wer in use, and their influence 
on the latter depends on the circumstances of Lhe case. 

B. Factors leading to an increase in the total volume of 
purchasing power in use. 

r n J : Su £ h + an in ^ase can be brought about through a changed 
relation between the demand for credit and the supply of new 
savings Circumstances which tend to increase the demand for 
capital for real investment accordingly Lend to increase purchasing 
power or to check its decline. In oilier words, increased invest- 
Sf ™ M i SSLFwS b y, wh i c]l Purchasing power may be increased. 
As explained in Chapter VI E, one way of increasing investment 
is to reduce costs in the investment trades • real investment is 
likely to expand far more than in proportion to any reduction 
eticcted. An expansion in investment activity after a period of 
depression lias also sometimes been called forth bv new inventions 
and other tonus of technical progress, rendering profitable the 
adoption of new machines and new methods of production 
requiring capital investment. Moreover, owing to the small 
amount of new investment during the first part of a depression 
a need for certain forms of investment — for instance, in building 
— develops. This has occurred during most of the major previous 
depressions. The more insistent that need, the greater has as 
a rule, been the stimulus to invest capital. In other words 'the 
existence during the depression of a reserve of investment: 
requirements has been a factor making for earlv and rapid 
recovery. It matters little from this point of view" whether the 
investment is in producers' investment, goods or in other invest- 
ment goods — i.e., durable consumers' goods, such as motor- 
cars furniture etc. Naturally, consumers often postpone 
purchases of the latter class of commodities during the first 
part of the depression, but the fact that this demand has been 
merely postponed may lead to an increase in purchases after 
a time. 

2. Total purchasing power in use may also be increased by 
a reduction in the percentage of the national income which is 
saved. Such a reduction leads to an increase in the demand 



— 295 — 

for consumers' goods in comparison with a supply of such goods, 
unless production has changed accordingly. Hence the prices 
of such commodities tend to rise. Demand for credit and thus 
demand for investment goods is not reduced but rather increased 
under such conditions. In general, recovery in one group tends 
to stimulate recovery in others. Not only does an increased output 
of consumers' goods lead to a growth in investment, but this 
growth in investment tends to increase employment and 
purchasing power and thus the production of consumption goods. 
This is, in fact, the reverse of the process which takes place 
when a depression has begun. 

3. Purchasing power may also be increased through a 
growth in the demand for credit to buy consumers' goods. 1 This 
might occur, for instance, if manufacturing industries were 
forced to pay higher wages and obtain the means of doing so 
through increased bank credit. There is no evidence to show 
that this has ever taken place on a considerable scale. On 
the other hand, Governments unable to balance their budgets 
have often borrowed instead of increasing taxation. In such 
cases the borrowed money has been used to maintain demand 
for consumption goods. 

As already mentioned, the information available regarding 
earlier depressions is so scanty that it is impossible to ascertain 
what role any one of the factors mentioned above has played 
in bringing about recovery in each individual case. The general 
impression obtained from a study of earlier cycles is, however, 
that in most cases a stimulus towards recovery has come from 
increased investment. Such an increase as already stated has 
been mainly due to : (1) A reduction in certain price and cost, 
items, both in long-term interest rates and in wages and raw 
materials in investment trades ; (2) Technical progress which 
has called for the production and install ation of new equipment 
and the development of new countries ; (3) A need i'or new 
investment due to the restriction of investment activity during 
the depression. In this respect building activity seems to have 
been especially important. Since the eighteen-nineties, in 
countries for which information is available, building activity 
has regularly fallen off before the turn of the cycle. During the 
real boom years, credit conditions have been stringent, interest 
rates high and capital for the financing of construction lias been 
dilut'iill' io secure. Hence some time after the outbreak of a 
depression, under the combined influence of reduced interest 
rales and costs and an accumulated need of new building, 



1 This, or course, comes to very much the same as 2 above lor it involves a 
reduction In net national savings. 



296 




constructional activity has been resumed. This resumption of 
activity appears to have occurred only a year or two after the 
crises of 1900 and 1907. 

In the United States, such a revival took place as early 
as 1921, not much more than a year after the outbreak of the 
severe post-war depression. In the following years, investments 
in motor-cars, roads and electrification were also large. It 
seems highly probable, as already mentioned above, that the 
existence of a need for such large and such varied investments 
was an important factor in bringing about a speedy recovery. 
In other countries as well as in the United States, investments 
in these years were very considerable in manufacturing industries, 
partly owing to the fact that new machinery and equipment of 
much greater efficiency than those of pre-war days were put on 
the market. Old machinery was accordingly replaced on a large 
scale. The liquidation of less efficient firms on this as on many 
other occasions left room for an expansion of the capacity of 
those that survived. 

Railway building and investment in railway equipment has 
been one factor other than housing that has played a large role 
in the development of the business cycle. This factor was of 
course of more especial importance in the last century. During 
the last decades before the war a large part of such investment 
occurred in other countries than those which supplied the capital. 
The capital-exporting countries found it more profitable to open 
up new countries — for instance, through investments in commu- 
nications of different sorts — than to invest at home. The orders 
thus obtained for their export industries naturally had very 
much ihe same influence as if investment had taken place within 
their own territory, although temporary transfer difficulties may 
have occurred. 

The rapid increase in population had much to do with this 
growing need of investment. Housing and communications 
were of course most directly affected by this factor. 

To what extent increased sales owing to price and cost 
reductions have contributed towards recovery during the earlier 
depressions it is difficult to judge. It seems not improbable, 
however, that this factor has contributed to revival on certain 
occasions — in particular in the eighteen-eighties, when in some 
countries no marked increase in real investment seems to have 
taken place during the first years of recovery. 

The effects of a reduction in cost owing to increased efficiency 
may be quite different. It tends to increase the volume of 
production, but, if it does not involve more investment, it is 
doubtful if it stimulates conditions in other industries and thus 
contributes to a general recovery. 



— 297 — 

Lack of data also makes it impossible to say whether the 
exliustton of stocks has been an important factor in stimulating 

a revival of business prosperity. -vitfence 

Manv economists attach great importance to he ™ "« 
of what maybe called a cyclical movement m huma W^^rrd 
After a period of pessimism, business "fa*£*J$$ 
recovery as natural, and in preparation for this recovery mgui 

*° tES in rea! investment may be illustrated by the 
chart 40 wWch shows the change in the volume of Hivesinent 
in Germany Although available data relating to investments 

Chart 40. 

Investment and Consumption ' in Germany 1863-1913. 




tol.m '.-.' <-Ml.,m;,l mills. I I'M 1U- ""•! imported furs. 



— 298 — 

are incomplete and the actual fluctuations therefore probably 
exaggerated on the chart, this chart serves to give a rough 
indication of the tendencies. The severe depression after 1873 
must have been connected with the drop in investment activity. 
A heavy decline in interest rates and a reduction in wages and 
raw-material prices failed to call forth any substantial increase 
in private investment in Germany. In the previous decade, the 
volume of investment, as already remarked, had been very large. 
Secondly, the agricultural depression counteracted the tendencies 
towards expansion elsewhere. A very large part of the new 
investments in this decade were effected by public authorities. 

In view of the foregoing considerations, the situation in 1931 
appears in some respects rather serious. It is uncertain whether 
commodity stocks have been reduced to such a degree that a 
stimulus from a tendency towards replenishing them can be 
expected until recovery is well under way for other reasons. 
Again, conditions do not seem to favour a considerable increase 
in investment. The very large investment which took place in 
most countries in the years preceding 1929 has created a surplus 
capacity almost everywhere, and it is not clear in what directions 
new investment should be made in the near future. Building was 
active, not only until the outbreak of the crisis, but in some cases 
one or two years longer. While this helped to mitigate the 
depression during 1930, it has reduced the chances of an early 
increase in construction and thus of a stimulus to recoveiy from 
that quarter. In the second place, the cost reductions in the 
investment trades have been very small relative to price reductions 
elsewhere and the long-term rate of interest has declined very 
little. In the third place capital is not flowing freely to countries 
where there might be a need of new investment. It is impeded, 
above all, bj' lack of confidence, which makes capitalists demand 
high risk premia. Finally, there is a widespread feeling of inse- 
curity in business circles regarding the future course of the price 
level. Many find ground for anxiety in the gold situation and 
many are convinced that, if prices continue to fall or even fail to 
rise, heavy wage reductions will be necessary ; strikes and lock- 
outs will occur ; the burden of debts will be increased and many 
other difficulties will arise. 

In forming an opinion as to the chances of a real recovery 
in the near future, it should be borne in mind that the forces 
making for recovery may be strengthened and the conditions 
radically altered by organised efforts of a national or interna- 
tional character. 



Chapter VIII. 

THE SITUATION IN THE SUMMER OF 1931. 



Financial conditions. 

The financial history or the summer of 1931 has been somewhat 
dramatic. Waves of optimism and pessimism have followed 
one another very rapidly, but confidence has definitely tended 
to decline since April. During that month, not only did it 
appear that the rate of the depression had slowed down, but 
many competent observers were of the opinion that the improve- 
ment over and above, the normal seasonal movement which had 
taken place in the United States of America and some other 
countries would continue. Unfortunately, these expectations 
have not been fulfilled. The existence of certain financial 
strains, the natural result of a long depression, have led to a 
number of failures of banks in certain countries ; these failures 
have had worldwide repercussions. Some purely financial 
circumstances seem to have played a larger role during the 
last four months than in earlier periods of the depression. 

The suspension of payments by an important Austrian 
bank in May shook confidence in the financial condition of 
Austria, and the position of Germany also began to give rise to 
apprehension. In Germany, a large part of the enormous 
foreign investments on short-term, estimated at about ten 
milliard marks in December 1930. had been withdraw! in the 
course of the spring. The foreign exchange position of the 
Reichsbank as a result had been much weakened. As confidence 
in the financial stability of Germany declined still further in May 
and June, withdrawals of foreign funds continued ; it has been 
estimated that, during the first seven months of 1931, 2,900 
million marks of foreign short-term funds were withdrawn, 
These withdrawals created great difficulties for many of the 
commercial banks. 

The proposal made by President Hoover in June that all 
payments on account of reparations and war debts should be 




— 300 — 

suspended for one year brought a measure of temporary relief. 
The immediate rise in the prices both of bonds and of stocks 
was a reflection of the revival in confidence. Even commodity 
prices, as will be seen below, rose considerably in the following 
week. 

This revival of confidence was, however, shortlived. In 
spite of the fact that the Reichsbank obtained large new credits 
(630 million marks) through the Bank for International Settle- 
ments, certain Central Banks and a New York financial group, 
ihe financial position was very uncertain. 

One of the most important German banks suspended payments 
in the beginning of July, and the gravi ty of the situation rapidly 
increased. To protect Ihe gold stock and foreign exchange 
reserves of the Reichsbank which, in spite of the new credits, 
had declined about 1,000 million marks since the beginning 
of the year, severe restrictions were placed on the purchase 
of foreign exchange, and on the withdrawal of deposits in 
German commercial banks and savings banks. 

During the first half of August, conditions on the capital 
market became slightly more normal. The discount rate, 
which had been raised to 15 per cent, was again lowered to 
10 per cent. The stock exchanges in Germany, however, which 
had been closed airly in July, did not re-open. Negotiations 
were opened between German and foreign bankers with a view 
to preventing further withdrawals of foreign funds and to replace 
loans which were to fall due in the near future. These negotiations 
lead to an agreement which is to run for a period of six months. 
Nevertheless the financial situation of Germany towards the 
end of August was still highly insecure. 

Serious financial difficulties were also experienced in some 
other countries. In general, the position of the European 
debtor States was less stable than earlier in the depression. 
This is reflected, for instance, in the quotations of the bonds of 
these countries on the stock exchanges of the leading capital- 
exporting countries. 

The financial position of many debtor countries in other 
continents had already become grave long before the summer 
of 1931, A number of Lhem had been obliged to depart from 
the gold standard, and the currencies of some of these continued 
to depreciate. a In certain cases the service of the foreign debt 
obligations was discontinued. 

All these financial disturbances inevitably affected the 
London money market. During the spring and early summer, 
short-term funds moved towards London and the open-market 



Sec Table III below. 



— 301 — 

rate there fell to alow level — from 2.59 per cent in April to 2.09 
per cent in June. On the outbreak of the crisis in Germany, 
however, funds were withdrawn from London, largely to Paris, 
and the Bank of England was obliged to export a considerable 
amount of gold. The open-market rate rose to 2.60 per cent in 
July (monthly average). During the last three weeks of July 
alone, the gold reserve of the Bank of England was reduced 
by no less than £32 million, or about 20 per cent. A credit of 
£50 million was granted to the Bank of England by the Federal 
Reserve Bank of New York and the Banque de France, but 
in spite of this the sterling exchange remained low as the outflow 
of foreign funds continued and the financial situation of the 
United Kingdom become more adn more disquieting. 

That the recovery which seemed to be taking place in the 
spring was interrupted in the summer may be clearly seen 
from a study of financial statistics. 

The discount rates towards the middle of August were in 
many countries substantially higher than three months earlier. 
The most important exceptions were certain capital-exporting 
countries such as the United States, France and Switzerland. 

Table I. — Central Banks' Rates of Discount, 1931. x 



Germany 

Austria 

Hungary 

United Kingdom .... 

France 

United States (New York) 
Switzerland 



End of 
May 1931 



per cent 

5 
5 
5 
2 
2 
1 
2 



y 2 



Vz 



Middle of 
August 1931 



per cent 

10 
10 

9 

4 

2 

1 

2 



Vz 



I 



The open-market rates followed a broadly similar course. 
They rose rapidly in the debtor countries and continued to 
fall in some of the lending countries, but rose in others more 
or less in accordance with discount rates. 

The magnitude of the gold exports from certain countries to 
which the financial difficulties gave rise is shown in the following 
table. The principal recipients of this gold, as well as the newly- 
mined gold, were France, the United States and the Netherlands. 



Source : LaaifM »/ Nations, Monthly Bulletin <>j Statistics. 



302 — 



303 — 



In June and July, practically the whole amount went to France. 
Naturally, some countries reduced their foreign exchange reserves 
instead of their gold stock, but with much the same effect on 
their financial position. 

Table II. — Changes in the Gold Reserves of Certain Central Banks. 1 

(000,000's). 



Germany 

(RM.) 



United 
Kingdom 

m 



April 
May 
June 
July 



47 

20 

969 

58 



3.3 

4.9 

11.9 

30.7 



France 
(French 
francs) 



- 500 

+ 18 

+ 788 

+ 1981 



United 

Stales 

(?) 



+ 46 

+ 89 

+ 133 

+ 61 



Swit zer- 

land 

(Swiss 

francs) 






+ 92 

+ 28 



Ncl her- 

lands 
(Florins) 



+ 4 


+ 47 
+ 89 



The financial difficulties are also reflected in the figures for 
notes in circulation. In many countries where stringent monetary 
conditions prevailed, the note issue increased substantially 
from June to July. Average note circulation in July was above 
that of the previous month by 4 per cent in Germany, 9 per cent 
in Austria and 30 per cent in Hungary. 

The depreciation of certain currencies is illustrated by the 
following table. In some of the South American countries and 
in Australia no further depreciation has taken place in recent 
months ; nevertheless, the downward movement of prices has 
further weakened their financial position. 

Table III. — Depreciation of Certain Currencies. x 
(Percentage discount). 



On New York 


On London 




Argentine 


Brazil 


Uruguay 


Venezuela 


Australia 


New 
Zealand 


1931 

Jan . . . 
April . . 
June . . 
Aug. 1,1 . 


- 28 

- 21 

- 27 

- 31 


— 24 

- 39 

— 37 

- 47 


— 34 

- 35 

- m 


_ 4 

- 12 

- 11 

- 10 2 


- 17 

- 23 

- 23 
-23 


- 6 

- 9 

- 9 

- 9 



Source : League of Nations, Monthly Bulletin of Statistics. 
.July. 






The yield of domestic high-grade bonds rose slighthy in the 
lending countries, but much less than that of bonds of borrowing 
countries, as shown in the following tables. In other words, the 
risk premium on foreign bonds increased considerably, a fact 
which reflects very clearly the weakening in confidence. 



Table IV. — Index Number of Bond Prices. 1 
(1928 = 100). 





New York 


London 


Paris 


6 V 


98.2 
96.7 
98.1 
97.4 
96.9 


95.8 
94.2 
96.5 
92.9 
92.3 


110 9 


3 VI 

1 VII. 

5 VIII 


110.6 

108.1 
110 5 


12 VIII 


110.4 



Table V. — Price of Foreign Government Bonds in London. 2 

(In Shillings) 





Argen- 
tine 

4 °/ 


Austria 

7% 


Brazil 

6%% 


Chili 

6% 


China 

5% 


Hun- 
gary 


India 

4 Vi % 


Aus- 
tralia 




Recess 


nat. 


1927 


1929 


1912 


7%% 


5% 


20 V . 


82% 


94% 


53% 


74% 


43 


102 


79% 


70 


3 VI . 


78% 


101 % 


44 


68% 


40 


100 


74 V, 


68 


10 VI . 


82 


102 


55% 


72% 


41 


98 


75 


69 


17 VI . 


82 


102 


56% 


66% 


41 


93% 


74 


69 


24 VI . 


85% 


88% 


60 


65% 


44 


96% 


75 


69 


22 VII. 


81 


103% 


64 


56 


46 


88 


76 


78% 


18 VIII 


75% 


80 


59% 


35 


43 


78 


74 


74% 



The changes in the quotation of the German Young Loan, 
as shown in Chart 41, arc significant. A comparison with table V 
shows that the. quotations of other European and South- 
American foreign bonds followed a broadly similar course, 
although the fluctuations were less considerable. 



1 Source : Index Number Institute, Incorporated, 
' Source : Economist. 




— 304 — 

Chart 41. 
Yield of the Young Loan in London. 



£ 

10 h 



10 17 

■JU/N-JVNE 



24 



s.a.Mi'/'/fJS*? 



19 3 1 



8 15 22 

- JU/LLET -JULY- 



29 5 12 

' ~>~AoDr 

Aueusr 



Source : The Economist. 



The spring revival on the Stock Exchange came to an end 
in March and was succeeded by a downward movement in most 
countries as may be seen from the Chart 42. This decline 
was intensified in May, and very low levels were reached at the 
beginning of June. On the announcement of the Hoover proposal, 
the markets rallied sharply, but after a week or two the downward 
movement was resumed. In the first half of August, conditions 
on the stock exchanges were relatively quiet and the level of 
quotations in most countries was a little above the lowest point 
reached in June. 

The available figures for business failures in the leading 
countries show no increase compared with last year. This 
would appear to indicate that the banking system has been 
able to maintain sufficient flexibility to avoid financial break- 
down of business firms on a large scale. On the other hand, 
the number and importance of bank failures seems to have 






■Ml 



— 305 








CO 
05 

Z 

W 
u 

2 

Oh 

H 

H 
« 
3 
< 

a 

a 



o 

H 
GO 








S3 V 

- s 










j \ 


\ 










I / / 


I 










/ ' 

1 / 1 
' ( ( 










i 

i 


\ \ 

\ \ 










/ 
/ 


/ s 
/ s 
/ / 










i / 
i / 


s 


* 
* 

* 
r 
i 
* 






fN> 


\ \ 
\ \ 
\ 














**S 








■ i * 
















* 






c 






1/ %/ 1 


f 

r 




2 


3 








t 
t 










i ! 


/ 




s 

3 
> 




/ 


\ -1 
/ \ / 






8 

■a 
e 

a 
u 




\ 


k 


s 










C3 Q 
*3 iO 


O 


=1 
o 
M 



— 306 — 

increased, not only in some European borrowing countries, but 
also in the United States. The financial position of farmers 
has been further weakened, but the number of forced sales 
of farms has not so far reached serious proportions. 

International capital movements have been entirely under 
the influence of the events which were described at the beginning 
of this chapter. While the movements of liquid funds have 
been very large, the lack of confidence has prevented 
considerable issues of long-term loans for foreign account. In 
the United Kingdom the amount of new issues for foreign account 
in the second quarter was only one-half of that in the corres- 
ponding period of last vear, while in the United States it fell 
to nearly one-fifteenth." It is noticeable, however, that inthe 
course of the first half of the year France lent large sums to 
certain South-Eastern European countries. In all transactions 
of this sort the risk premium has been very considerable. 
There are signs that towards the end of the summer confidence 
in the financial stability of Europe had been so shaken that it 
became increasingly difficult even for first class financial houses 
and business firms to obtain renewal of short term credits granted 
by bankers in the financially strongest countries. This was 
one of the most serious aspects of the financial crisis in August. 

The figures for new capital issues, which are given in the 
table below, indicate that the volume of investment during 
the second quarter of 1931 has been on a lower level than during 
the first quarter of the year except, possibly, in Germany. In 
the United Kingdom and the United States, the total for the 
second quarter of 1931 is only about one-third of the figure 
for the corresponding period of last year. 

Table VI. — Capital Issues. 1 
(000,000's omitted.) 



1930 
1st quarter 
2nd quarter 

1931 

1st quarter 
2nd quarter 



France 
(Francs) 



Germany 

(KM.) 



Total 



6,927 
4,746 



6,024 
4,239 



Total 



220.5 
93.9 



136.8 
330.9 



United Kingdom 
(£) 



Total 



Foreign 



United States 

(S) 



Total Foreign 



69.6 
72.3 



45.3 
25.5 



33.3 
35.7 



24.0 
18.9 



2,145 
2,718 



1,233 
960 



297 
471 



147 
33 




Source : League 



of Nations, Monthly Bulletin of Statistics, 



— 307 — 

Production. 

It is clear from the above account that financial conditions 
have been much aggravated since the spring. The downward 
movement in production, on the other hand, has been less pro- 
nounced. It is true that the spring revival in industry has 
not continued ; but the recession in the course of the summer 
has been relatively small. On the whole, the second quarter 
of the year has been a period of stagnation in production rather 
than of intensified decline. (See the production charts in Chapters 
IV and VI— D.) 

The figures for unemployment point to much the same 
conclusion. 

Table VII. — Unemployment. J 





Germany s 


France s 


Italy s " 


United 
Kingdom : ' 


United 
States ■ 




193(1 


1031 


11130 


1931 


1930 


1931 


1930 


1931 


1930 


1931 


April 


2,786 


4,358 


11 


69 


372 


670 


1,309 


2,027 


85.5 


74.5 


May 


2,634 


4,053 


12 


57 


367 


635 


1,339 


2,019 84.5 


74.1 


June 


2,670 


3,954 


10 


51 


322 


574 


1,341 


2,037 


83.6 


72.2 


July 


2,765 


3,990 


9 


51 


342 


63 % 


1,405 


2,074 


81.6 





The situation has, however, been very different in various 
industries. On the whole, those producing consumers' goods other 
than motor-cars have been able to maintain the level of output 
reached in the spring. In some countries the production of 
these industries is even higher than last year, while in the rest 
only a slight reduction has taken place. For instance, in the 
United States the output of shoes, silk, rayon, cotton goods 
and tiles has increased considerably and is much above the level 
of the same period in 1930. In some cases — for instance, in 
the boot and shoe industry — the increased demand would 
seem to be due to the fact that delayed purchases can no longer 
be put off. In Germany, the index of the output of textile 
goods (1928 = 100) rose from 80 in the first quarter to 87 as 
an average for April and May. Poland reports an increase in 
the production of textiles of nearly 10 per cent. In France, 
on the other hand, there was a decline of 7 per cent. 

1 Sourer : League of Nations, Monthly Bulletin of Statistics. 
'■' Number u i n ■ i i i | > I < i v < ' < 1 in thousands. 
' \V 1 1 1 > 1 1 y unemployed. 
* hulls til' employment . 



— 308 — 

Industries producing the more expensive consumers' goods, 
such as motor-cars, and equipment goods — in other words, 
those the demand for whose products involves the investment 
of savings — have not fared so well. It would appear that 
their output has continued to decline rapidly in most countries. 
For instance, the production of motor-cars in the United States 
was 21 per cent lower in June than in May, and again 15 per 
cent lower in July than in June. In the iron and steel industry, 
a continued decline is everywhere reported, and in the United 
States the industry is unable to utilise more than 30 per cent 
of its capacity. The production of non-ferrous metals and 
machines is similarly affected. In industries producing invest- 
ment goods, the rate of decline seems to be about the same as 
in the corresponding period last year. 

It has already been mentioned in Chapter V that the volume of 
construction continues to decline. The figures for new building 
permits leave no doubt that this movement will continue for 
some time. It is striking, however, that in some countries 
building activity has declined only to a very small extent if at 
all. This seems to be partly due to the fact that capitalists 
find houses a relatively safe investment. 

Table VIII. — Building Activity. 





Germany 


Great Britain * 


United States l 




Building permits. 
Number of 
apartments 

(000"s omitted) 


Building permits 

£(000,000's 

omitted) 


Contracts awarded 

S (000,000's 

omitted) 




Total 


Resident. 


1930 : 1st quarter 

2nd quarter 

1931 : 1st quarter 

2nd quarter 


l 

15.9 
28.1 

14.9 


2 

17.3 
19.4 


18.8 
20.2 

16.1 
16.8 


1,097 
940 5 

831 
642 5 


243 
240 5 

233 
185 5 



The volume of shipbuilding is also declining, as shown in 
Chapter V. The situation is, however, very different in different 



1 85 larger cities. 

2 96 larger cities. 

3 144 towns. 

4 37 States. 

6 April and May only. 



— 309 — 

countries. In the United States and Italy, a definite increase 
was registered in the second quarter of 1931. 

Table IX. — Vessels commenced 1 . 
(Gross tons, 000's omi ! :ted.) 









Great 












World 


Britain 

and 
Ireland 


United 
States 


Germany 


Italy 


1930: 


2nd quarter 


580 


230 


58 


64 


13 


1931 : 


1st quarter 


241 


33 


46 


3 


13 


1931 : 


2nd quarter 


234 


23 


89 


26 


29 



It would appear that the depression in agriculture continues 
unabated. Prices of cereals have dropped considerably since 
the spring, and were in the case of wheat in the first half of 
August 40 per cent below those ruling in August last year, 
although supply conditions seem to be very much the same 
as in 1930. In most European countries, it is estimated that 
the crop will be a little smaller than last year. In Canada, 
the crop is not expected to exceed 60 per cent of that obtained 
last year, chiefly as a result of the severe drought. In the 
United States, and as far as is known in Russia, the crop is 
expected to be roughly equal to that of last year, and in Russia 
big enough to allow for a considerable export surplus. The 
world supply will probably be somewhat smaller than in 1930. 

The conditions of supply of other foodstuffs are also not 
very different from those of last year. A considerable reduction 
in most countries in the acreage under sugar-beet is offset by an 
increase in Russia. 



Prices Wages, Profits. 

The movement in the prices of certain important commodities 
is shown in Chart 43. 

After relative stability during the spring months, prices of 
all important groups of commodities have on the whole tended 
downwards, with a marked interruption in June. 

As in the case of cereals, other foodstuffs have continued to 
fall in price. During the summer the decline in the prices of animal 



1 Source : Montis' lleyiater of Slilpplny. 



— 310 — 

Chart 43. 
Wholesale Prices of certain Commodities '. 




JfOi. FEft WAH3 AVR MAI 6 15 20 27 4 II Ifl 25 1 8 . IS 22 

JAW- FEB. MAHCM APB MAVt JUIN /i_ JUILLET__/^_ AOUT , 

*****,„, JUKE JULY AUJ.U5T 




JAft - _ E5 MABCH 



9 1 It 4 II I & I ( t R S 

APH. MAY * JUI f* i i^.JUILl.ET_y 1 _ AO&T/ _, 

' 4UHE JUL* RU&tl&l 



foodstuffs was especially marked, but a considerable recovery 
took place in August. 

The rise in June was very considerable in the case of most 
commodities, but especially coffee, cotton, copper and lead. For 
wheat and some other products the decline was only arrested ; 
in July and August a general decline was resumed. The recent 
drop has been particularly pronounced in cotton, rubber, copper, 
lead and petroleum. Prices of foodstuffs have been relatively 
well maintained. 



1 Prices in Shillings if not otherwise indicated. 

Source : Economist, Wochenberichte des Instituts fur Konjunkturforschmig. 



— 311 — 

Strong domestic factors in certain countries have greatly 
influenced the course of the wholesale price level. Its decline 
has been arrested in certain cases. In some countries the price 
indices have actually risen : in Austria, from 107 in May to 114 in 
July 1931 ; in Chile, from 92 in December 1930 to 99 in May 1931 ; 
in Czechoslovakia, from 109 in May to 112 in June 1931. In 
others — for example, in India — the decline in prices has been in- 
tensified. 

Shipping rates rose in May, but during the summer again 
began to fall. In July the index number of the Economist was 
almost 9 per cent lower than in May. Changes in wage rates have 
not been much more pronounced than in earlier periods of 
the depression. It is believed, however, that the manufacturers 
in many countries now consider substantial wage cuts to be 
necessary. While hope was still generally entertained that 
a recovery would come in the course of 1931, manufacturers 
preferred to leave wage rates unchanged in order to escape the 
conflicts which usually accompany considerable wage reductions ; 
in recent months, however, the feeling has been growing that 
with little prospect of a speedy and rapid recovery the present 
discrepancy between cost and price levels must be reduced if 
production is to continue. 

The rise in output in the United States during the spring 
months of 1931 has had a favourable effect on profits, in which 
there has been something more than a seasonal increase during 
the second quarter. Here again the situation has been much 
more favourable in the case of industries producing consumers' 
goods. Comparable figures for other countries are not available. 



Trade. 

The figures for world trade in the second quarter are not yet 
known, but figures which are available for certain important coun- 
tries show that the tendency is still downwards, although the 
rate of the decline seems to be smaller than last year. The reduc- 
tion from the first quarter to the second has been very small in 
Germany and France, the United States and the United Kingdom, 
in which it reached 10-20 per cent last year. In the case of India, 
however, the decline is of the same magnitude as in 1930. The 
German trade balance has become increasingly active under 
the influence of the severe credit restrictions. In July the excess 
of exports over imports amounted to a quarter of a milliard marks. 

The figures for retail trade which have been given in Chapter 
V-A. reflect the relative stability of consumers' demand for 
non-durable goods and suggest that delayed purchases of certain 
semi-durable goods are now being effected. The increased volume 



— 312 — 

of sales of certain commodities and the relatively small reduction 
aggregate sales is one of the most favourable and hopeful aspects 
of the present situation. 

Public Finance. 

The continued depression is of course only beginning to 
show its full effects on the state of public finances during the 
present year. The yield of taxes is everywhere declining and 
the difficulties in balancing the budgets are considerable. One 
result has been a tendency to curtail expenditure on public works 
and thus reduce the volume of real investment. 

These financial difficulties have made themselves felt not 
only in some of the financially weaker States buL even in certain 
creditor conntries. Among the factors which help to reduce 
confidence in the financial stability of the world this is one of 
considerable importance. 

General Remarks. 

During the summer of 1931, as at other times in the past 
two years, conditions have differed widely from one country to 
another. Although the relative position of the different countries 
does not seem to have changed very greatly in the last few 
months, in certain countries which have suffered most the 
rate of the depression has been diminished to some extent since 
the early spring, and in others which were favourably situated 
in 1930, such as France and the Scandinavian countries, conditions 
have grown rapidly worse. 

On the whole, economic conditions seem to have altered 
less during the summer in non-European countries and in the 
U. S. S. R. than in the rest of Europe. This has probably been 
largely due to the fact that Europe has suffered from a financial 
crisis of extreme gravity. 

It is remarkable, however, how little influence this acute 
financial crisis had exercised on production and trade up to the 
middle of August. Financial disturbances which do not lead to 
a breakdown of credit on a large scale and are of relatively short 
duration do not necessarily exercise any considerable adverse 
influence on production. On the other hand, if such disturbances 
continue, the effects on economic life may be very serious — for 
example, if the tendency of taking capital away from Germany 
should continue, the pressure on the German balance of payments 
will force a reduction of couimodity imports and an increase 
in commodity exports at reduced prices, with an unfavourable 
influence on international economic conditions. One way in 



— 313 — 

which financial difficulties have tended to depress industry and 
trade is by strengthening the belief held in many quarters that 
commodity prices will continue to decline. This widespread belief 
is indeed one of the principal obstacles in the way of economic 
recovery, and the means by which it may be dissipated is ore of 
the main financial problems of the day. "it is a part of the larger 
and indeed the dominating problem bow the decline in wholesale 
prices can be arrested a rapid solution of which is necessary if 
an intensification of the depression — perhaps a general financial 
breakdown — is to be avoided. 

It is difficult to judge to what extent these financial difficulties 
are due to other circumstances than the cumulative effects of 
a long depression and the violent price decline. No doubt 
the extreme political instability and the general lack of confidence 
which has resulted therefrom have exercised a disturbing influence 
on international financial relations. 

Tire disastrous consequences of the general lack of confidence 
in the world to-day are becoming more and more evident, and 
no considerable revival in economic life can be expected until 
confidence has been strengthened. 



APPENDIX 



Table L 



New Capital Issues on Foreign Account in the United 

States and the United Kingdom. 1 

($000,000's.) 







Asie 




Ca- 
nada et 




Emis- 








et 




Terre 


Ame- 


sions 








Ocea- 




Neuve 


rique 


non 




Emissions en 
Issues in 


Europe 


nie 
Asia 
and 


Afri- 

que 

Africa 


Ca- 
nada 
and 


latine 
Latin 
Ame- 


speci- 
fiers 
Issues 


Total 






Ocea- 




New- 


rica 


not 








nia 




found- 
land 




speci- 
fied 




Etats-Unis-U.S.A. : 
















1924 


527 


100 





151 


191 





969 


1925 . 




629 


147 


■ — 


137 


163 


- — 


1,076 


1926 . 




484 


38 





226 


377 





1,125 


1927 . 




577 


164 





237 


359 


— 


1,337 


1928 . 


■ - - 


598 


137 


-_ 


185 


331 





1,251 


1929 . 




142 


58 


— 


295 


176 





671 


1930 . 




233 


62 


— 


281 


199 


2 130 


905 


Royaume-Uni -Uni- 
















ted Kingdom 


















1924 . . . 




159 


314 


66 


20 


31 


3 


593 


1925 . 






53 


216 


72 


10 


68 


5 


424 


1926 . 






120 


226 


32 


29 


129 


10 


546 


1927 . 






105 


238 


136 


34 


126 


35 


674 


1928 . 






164 


232 


80 


98 


96 


28 


698 


1929 . 






105 


139 


51 


74 


78 


12 


459 


1930. 


• 




53 


195 


129 


17 


101 


34 


529 



1 Issues for refunding purposes are excluded, 
nominal value, the British to prices of issue. 

2 " International issues". 



The American figures refer lo 



Source : U. S. A. 
Kingdom 



Handbook ol American Underwriting Sirnrlllrn. 
■■ ■ London Join! City und Midland llnnk Lid. 



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321 — 



Table IV. 



World Consumption of Wheat. 
(Not including quantities for sowing.) 





Consom- 
mationtotale 1 

Total 
consump. 1 


Population 


Consomm. 

par tete 

Consump. per 

head ol pop. 




Moy. 
Aver. 
1909- 
1913 


Moy. 
Aver. 
1925- 
1929 


Moy. 
Aver, 
1 !}(«>- 
1913 


Moy. 

Aver. 

1925- 
1929 


Moy. 
Aver. 
1909- 
1913 


Moy. 
Aver. 

1925- 
1929 




En milliers 

de quint aux 

Quintals 

(000,000's) 


En millions 
000,000's 


En 

kilogrammes 

Kilograms 


Monde entier 2 — World 
total 2 


764,1 


828,4 


1.159 


1.321 


66 


63 


Europe 

Canada 

Etats-Unis — U. S. A. . 

Argentine 

Australie — Australia 
Autres pays ■ — Other 
countries 


448,8 
22,8 

139,0 
12,0 

7,5 

134,0 


473.5 
20,5 

148,6 

16,1 

9,2 

160,5 


345 

7,2 
94 
7,1 
4,7 

700 


365 

9,6 
119 
10,8 

6,3 

810 


130 
314 
147 
171 
160 


130 
214 
125 
149 
146 



1 Source : International Institute of Agriculture. 

2 Not including U. S. S. R., China and Turkey (for post-war period, Palestine, 
Syria and Lebanon, Iraq also excluded). 






li 



322 



— 323 



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Table VII. 

Changes in the Quantum of Imports and Exports of 
Twenty-five Countries in 1930. 

(1929 = 100.) 



Importations 
Imports 



Exportations 
Exports 



Algerie - — Algeria 

Allemagne — Germany 

Chine — China 

Danemark — Denmark 

Estonie — Estonia 

Etats-TJnis d'Amerique — U. S. A. . . 

Finlande — Finland 

France 

Indes neerlandaises — Netherlands Indies 

Italie - — Italy 

Lettonie — Latvia 

Nouvelle-Zelande — New Zealand . . 
Royaume-Uni — United Kingdom . . 
Tchecoslovaquie — Czechoslovakia . . 
Union Sud-Africaine — Union of S.Africa 




118 
96 
82 

112 
97 
82 
89 
89 

117 
95 

106 

104 
83 
96 
86 



— 326 — 



327 — 



Table VIII. 

Changes in Quantum of Trade of Three Countries in 
1929 and 1930 (by Classes of Commodities). 

(1928 = 100.) 





Imporl aliens 
Imports 


Expectations 
Exports 




1929 


1930 


1929 


1930 


Royaume-Uni — United Kingdom : 

1 . Denrees alimentaires, boissons et 
tabacs — Food, drink and tobacco 

2. Matieres premieres et articles en 
majeure partie non manufactures 
— Raw materials and articles 
mainly unmanufactured .... 

3 . Articles entierement ou en majeure 
partie manufactures — Articles, 
wholly or mainly manufactured . 


103,5 

111,4 
104,4 


104,9 

99,8 
104,5 


112,9 

112,9 
101,3 


105,8 

95,2 
81,1 


a) Total (importations demeurees 
dans le pays) — Total (Retained 
imports) 


105,9 


103,4 


103,5 


84,6 






b) Total (importations y compris les 
reexportations) — Total (Imports 
including re-exports) 


105,0 


102,4 


103,6 


84,7 


Reexportations — Re-exports . . 


96,7 


92,7 







Table VIII (continued). 

Changes in Quantum of Trade of Three Countries in 
1929 and 1930 (by Classes of Commodities) (continued). 

(1928 = 100.) 





Importations 
Imports 


Export ations 
Exports 




1929 


1930 


1929 | 1930 


France 

1. Objets d'alimentation — Food- 

2. Matieres necessaires a l'industrie 
— Industrial materials 

3. Objets fabriques — Manufactured 
products 


110,1 
109,2 
136,2 


115,2 
112,6 
170,5 


95,7 

96,7 

100,6 


98,2 
90,0 
86,3 


Total 


114,6 


123,3 


99,3 


88,5 


Allemagne x — Germany x : 

1 . Animaux sur pied — Live animals 

2. Produits alimentaires et boissons 
— Food and drink 

3 . Matieres premieres et articles semi- 
manufactures — Raw and semi- 
manufactured goods 

4. Articles manufactures — Manu- 
factured articles 


103,7 
93,5 

99,6 
91,6 


85,4 
85,5 

90,2 
77,4 


104,3 
124,3 

109,1 
111,1 


438,3 
105,5 

101,5 
106,8 


Total des marchandises — 
Total merchandise 


96,4 


86,5 


111,3 


106,3 



1 Exports include reparations in kind. 






— 328 



Table IX. 



Change in the Value of Trade 

of Four Countries in 1929 and 1930 

(by Classes of Commodities). 

(1928 = 100.) 





Import a Li ons 
Imports 


Exportations 
Exports 




1929 


1930 


1929 


1930 


Eiats-Unis d'Amerique — U. S. A. : 

1 . Matieres premieres — Crude materials 

2. Produits alimentaires bruts — Crude 
foodstuffs 

3. Produits alimentaires manufactures 
— Manufactured foodstuffs .... 

4. Produits semi-manufactures — Semi- 
manufactured 

5. Produits finis — Finished manufac- 
tures 


106,3 
98,0 
104,4 
116,0 
109,7 


68,3 
72,9 
72,2 
79,7 
83,6 


88,3 
91,5 

103,9 
101,8 
112,0 


64,1 
60,7 
77,9 
71,6 
84,0 


Total 


lO?..", 


74,8 


102,5 


75,2 


Royaume-Uni — United Kingdom : 

1. Produits alimentaires, boissons et ta- 
bac — Food, drink and tobacco . . 

2. Matieres premieres et articles en ma- 
jeure partie non manufactures — 
Raw materials and articles mainly 
unmanufactured 

3. Articles entierement ou en majeure 
partie manufactures — Articles, 
wholly or mainly manufactured . . 


101,2 

106,4 
104,7 


89,7 

79,2 
97,1 


102,6 

112,6 
99,1 


88,9 

91,0 
76,0 


a) Total (importations demeurees dans 
le pays) — (retained imports) . . . 


103,5 


89,1 


100,7 


78,5 


b) Total (exportations y compris les 
reexportations) — (exports including 
re-exports) 


102,1 


87,4 


100,7 


78,9 


Reexportations — Re-exports . . . 


91,7 


72,5 







— 329 — 

Table IX (continued). 

Change in the Value of Trade 

of Four Countries in 1929 and 1930 

(by Classes of Commodities) (continued). 

(1928 = 100.) 





Importations 
Imports 


Exportations 
Exports 




1929 


1930 


1929 


1930 


France : 

1. Objets d'alimentation — Foodstuffs 

2. Matieres necessaires a l'industrie — 

3. Objets fabriques — Manufactured 


105,0 
106,5 

125,5 


94,2 

88,8 

141,9 


97,4 
96,2 
98,2 


94,2 
76,4 
84,1 




109,0 


98,0 


97,6 


83,4 


Allemagne 1 — Germany 1 : 

1. Animaux sur pied — Live animals. 

2. Produits alimentaites et boissons — 
Food and drink 


103,4 
91,3 

99,8 
92,6 


81,8 
70,9 

76,3 
73,4 


117,0 
112,6 

106,4 
110,7 


365,4 

77 


3. Matieres premieres et produits semi- 
manufactures — Raw and semi- 
manufactured goods 

4. Articles manufactures — Manufac- 
tured articles 


89,1 
101,7 


Total des marchandises — Total 
merchandise 


96,0 


74,2 


109,8 


98,0 



Exports include reparations in kind. 



— 330 — 



331 — 



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Selection of Recent Publications of the Economic and Financial 
Organisation of the League of Nations 

INTERIM REPORT OF THE GOLD DELEGATION OF THE 
FINANCIAL COMMITTEE. 

(Ser. L.o.N.P.1930.11.26.) 120 pages Price: 3/- $0.75 

SECOND INTERIM REPORT OF THE GOLD DELEGATION OF 
THE FINANCIAL COMMITTEE. 

(Ser.|L.o.N.P.1931.n.A.2.) 22 pages Price: 1/- $0.25 

SELECTED DOCUMENTS SUBMITTED TO THE GOLD 
DELEGATION OF THE FINANCIAL COMMITTEE. 

(Ser. L.o.N.P.lMO.rr.IM.) 87 pages Price: 2/6 $0.60 

SELECTED DOCUMENTS ON THE DISTRIBUTION OF GOLD 
SUBMITTED TO THJE GOLD DELEGATION OF THE FINANCIAL 
COMMITTEE. 

67 pages, 2 inset diagrams and 2 inset lables . Price: 2/- $0.50 

LEGISLATION ON GOLD. 

(Ser. L.o.N.P. 1930.11.29.) 375 pages Price: 12/- $3.00 

THE AGRICULTURAL CRISIS (Vol. I). 

I. Report of the Economic Committee on the Agricultural Crisis 

II, The Position of Agriculture in Various Countries. 

(Ser. L.O.N.P.1931.II.B.12/I.) 322 pages . . . Price : 7/6 $2.00 

Commission of Enquiry for European Union 

ECONOMIC DEPRESSION 

Report on Enquiry into Course and Phases of the Present Economic 
Depression. 

(Ser. L.O.N.P.1931.V1I.4.) 16 pages Price: 6d. $0.15 

Review of the Legal Aspects of Industrial Agreements, prepared for 
the Economic Committee by M. Henri Decugis (France), Mr. Robert 
E. Olds (United States of America) and M. Siegfried Tschiersky 
(Germany). 

(Ser. L.o.N.P.1930.11.11.) 95 pages Price : 3/- $0.75 

Review of the Economic Aspects of Several International Industrial 
Agreements, prepared for the Economic Committee by M. Antonio 
St. Benni (Italy), M. Clemens Lammers (Germany), M. Louis 
Marlio (France) and M. Aloys Meyer (Luxemburg). 

(Ser. L.O.N.P.1930.1M1.) 76 pages Price: 2/0 $0.00 



*A 



Publications of the Economic and Financial Organisation 
of the League of Nations 

Latest editions oi periodical publications : 

STATISTICAL YEAR-BOOK OF THE LEAGUE OF NATIONS 

1930-31. 

in wrappers . Price : 7/6 $2.00 

bound in cloth . » 10/- $3.00 

MEMORANDUM ON PRODUCTION AND TRADE, 
1925 TO 1929-30. 

(Ser. L.O.N.P.1931.II.A.19) Price: 3/3 $0.80 

In the. Press : 

s MEMORANDUM ON COMMERCIAL BANKS 1913-1929. 

MEMORANDUM ON INTERNATIONAL TRADE AND BALANCES 

OF PAYMENTS, 1927-1929. 

Volume I. Review of World Trade (Ser. 

L.o.N.P.1930.11.54/1) .... Price: 4/- $1.00 

Volume II. Balances of International Pay- 
ments (Sei. L.o.N.P. 1930.11. 
54/11) » 6/- $1.50 

Volume III. Trade Statistics of Sixty-four 
countries (Ser. L.o.N.P. 1930. 
II.54/III) » 10/- $2.50 

MEMORANDUM ON PUBLIC FINANCE, 1926-1928 10/- $2.50 

a supplement to which will be issued in the course of the present year 

MONTHLY BULLETIN OF STATISTICS. 

Annual subscriptions, 12 numbers ..... Price : 18/- $-4.50 
Per number » 1/6 $0.40 

Complete catalogue sent free on application. 

PUBLICATIONS DEPARTMENT, LEAGUE OF NATIONS, 

GENEVA 

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